1. Value Investing – Cyclicals
Practitioner’s Insights
Jiten Parmar
Twitter - @jitenkparmar
email : jiten.parmar@aurumcapital.in
https://aurumcapital.in
twitter - @Capitalaurum
email : info@aurumcapital.in
Jan 2022

2. ➢ Jiten is co-founder of Aurum Capital. Aurum Capital
is a SEBI registered investment advisory company
➢ The stocks discussed in this presentation are not
recommendations from Aurum Capital or Jiten
Parmar
➢ Some of these stocks may have been recommended
to our clients and Jiten Parmar may hold some of
these.
➢ This presentation is only for educational purpose and
does not constitute investment advice.
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Disclosures

3. Investing is multi-
disciplinary.
Psychology, history play
far bigger roles thean
science.
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Key Learning

4. JP

5. The first step to
successful investing is
knowing self. Knowing
your temperament and
mental fortitude
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Key Learning

6. ✓ There are different strategies in investing. And each may
have its merits. Choose the one that works for you
✓ Successful Investor trait – remove bias, rigidity
✓ When good times come, make it count. Ride your winners
and cut the losers
✓ Many investors keep watching the index, watch the stocks
instead
✓ Good stock at bad price may underperform bad stock at
good price
✓ Investing is more of an art, than science
✓ Temperament is the most important quality of a good
investor
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Observations/Quotes

7. ➢Understanding sector/business cycles
➢Understanding market cycles
➢Loads of patience
➢Overcoming Greed and Fear
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Cyclical Investing

8. Contrarian investing looks
great in hindsight, but it is
not easy. May have to
endure pain of
underperformance for a
period
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Contra Cyclical Investing

9. The pillar behind Contrarian
investing is value investing.
You buy business at
pessimistic valuations due to
temporary headwinds.
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Contra Cyclical Investing

10. Stocks are much more cyclical than what
people think. 90% listed companies are
cyclical. The degree of cyclicality can vary,
but cyclical they will mostly be.
There are 3 types of cycles
• Business Cycles
• Market Cycles
• Economic Cycles
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11. ➢We don’t have to be “exactly right”. We are
good even if we are “approximately right”
➢Don’t have to get in at “bottom”, nor get out
at the “top”
➢You just have to get the general direction right
➢Don’t mind leaving something on the table,
during exits
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Timing

12. ➢Within stocks and sectors, you have to
comprehend “business cycle” as well as
“market cycle”. They might not coincide. So do
make adjustments accordingly. “Best price”
may come before “best results” and “worst
price” may come before “worst results”
➢“Excel” investing rarely works in contra
cyclicals
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What do we have to comprehend?

13. JP

14. ➢ One ends up buying when ratios are bad - EBITDA margins,
ROE’s are down. Company might be in loss
➢ One sells when these show sharp uptick and company
becomes highly profitable
➢ Buy, let’s say, when PE is 60 (or -ve) and sell when it is 6
➢ Buy when sector is completely neglected and sell when it is
hot
➢ Buy when no one is covering the stock and sell when many
buy reports come
➢ Basically, a contrarian approach is required
➢ The bet is on “reversal to mean”
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Contrarian Approach/Inversion

15. ➢ Look for sectors out of favor
➢ Study the past cycles
➢ Study production data, supply/demand
➢ Check for capacity utilizations
➢ Check the reasons why sector/companies are not
performing
➢ Check the margins
➢ Check Price to Book (current, historical during
upcycle and downcycles)
➢ Check replacement costsJP
Evaluation

16. ✓Prepare a list of the stocks with the theme
✓Shortlist to 4/5 plays. Use basket approach in
investing
✓Stress test : Can the company survive another
couple of years of downturn ?
✓Initially, get the foot in the door
✓Wait for some companies to go bust or close
down some plants
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Investment Process

17. ✓Check insider buying/selling
✓Don’t look at PE
✓Price to book/replacement cost are better
parameters
✓Check if company has cash/manageable debt
✓Start initial buying at highest pessimism levels
✓As cycle starts turning add
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Investment Process

18. ➢ Try to get out before best earnings. Peak prices come before peak
earnings
➢ Always understand that there is “extra-ordinary” earnings in
upcycle. Don’t commit the folly of assuming these as normalized
earnings and look at it with a PE lens
➢ One can employ a strategy like getting in at 0.2-0.3 of P/B or
replacement and getting out at 1-1.2 of these
➢ Try to estimate normal EBITDA margins by averaging them over
downcycles and upcycles. Accordingly, calibrate your entry and exit
strategies
➢ Never repent if price still goes up after your sell, as long as you have
made good returns
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Exit Strategy

19. ➢ Always make positional plays
➢ These should never be 5-10 year plays
➢ Patience - Be ready to hold for a couple of years
➢ Make sure portfolio allocation is adhered to
➢ Never go more than 25% of your portfolio in a
single deep cyclical sector
➢ Do not change narrative, just to hold on to the
sector/stock
➢ Be prepared for failures. Cut when you realize it
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Rules I follow

20. Graphite Electrode company
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Case Studies
PE of 150 at price of 150 and PE of 5 at price of 4500

21. Graphite Electrode company
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Case Studies

22. Paper company
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Case Studies

23. Paper company
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Case Studies

24. Polyfilm company
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Case Studies

25. Polyfilm company
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Case Studies

26. Polyfilm company 2
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Case Studies

27. Polyfilm company 2
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Case Studies

28. Metal mining company
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Case Studies

29. Metal mining company
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Case Studies

30. JP
Sector leaders give
less upside in
upcycle and less
downside in
downcycle

31. Sugar company
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Case Studies

32. Sugar company
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Case Studies
Sector Leader

33. Sugar company 2
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Case Studies

34. Sugar company 2
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Case Studies
2nd tier company in the sector

35. Investment Philosophy
35
Our investment philosophy is value-oriented. We are patient and long-term
investors. At the same time, we also look at opportunistic plays. We are very
mindful of what we pay for acquiring any asset (stock).
The themes we focus on …
▪ Value + Growth at a reasonable price
▪ Turnaround opportunities
▪ Mispriced bets
▪ Cyclical/commodity stocks
▪ Special Situations

36. Investment Philosophy (contd..)
36
✓Value + Growth at a reasonable price
Qualities we look for
➢ Growth visibility for atleast the next 3 years
➢ Growth should be majorly self-funded and should not be at cost of high debt or significant equity dilution
➢ High percentage of capex should ideally be from internal accruals
➢ Should have survived past cycles reasonably well
➢ Should have superior or comparable margins as compared to peers
➢ Preferably should be in top 3 in the sector, or an incumbent with a significant value proposition/product
differentiation/superior technology
➢ Valuations…. All or majority of the above should be at reasonable valuations

37. Investment Philosophy (contd..)
37
✓Turnaround opportunities
What we look for
➢ A change trigger. Could be
▪ management change
▪ promoter change/nex-gen
▪ tech partnership
▪ cyclical turnaround
▪ a sustainable trend change in customer behaviour
▪ tailwinds
➢ Is there operating leverage ?
➢ Is there financial leverage ?

38. Investment Philosophy (contd..)
38
✓Mispriced bets
Factors to look at
➢ Company/sector facing temporary headwinds
➢ Maybe inventory losses leading to lower operating performance
➢ Capex done and poised for increase in Capacity utilization

39. Investment Philosophy (contd..)
39
✓Cyclical/commodities stocks
Key factors
➢ Company/sector facing downcycle or on cusp on cyclical turnaround
➢ For contra-cyclicals, invest when ratios are bad. ROCE and ROE have turned bad. Margins down
➢ See past cycles. How has the company navigated past cycles ? Both upcycle and downcycle
➢ P/B or replacement cost much better parameters to look at as against PE
➢ Detailed video on this is available at https://aurumcapital.in/blogs/2020/01/11/video-link-jiten-parmar-
presentation-on-cyclicality-at-ppfas-in-dec-2019/

40. Investment Philosophy (contd..)
40
✓Special situations
These can be
➢ Merger/demerger
➢ Buybacks
➢ Sale of business/division
➢ Rights offerings
➢ Bonus

41. Stock evaluation
41
➢ Atleast last 5 years annual reports
➢ Minimum 3 years concall transcripts
➢ Future potential (stocks are to be bought on future potential and not on current situation)
➢ Promoter holding/pledging
➢ Management quality should be above average
➢ No compromise on Corporate Governance
➢ Operating Cash flows
➢ Debt levels
➢ Competition
➢ Scuttlebutt. Speaking with suppliers/dealers/customers/past and current employees
➢ Pricing power
➢ Entry barrier
➢ Capacity utilization
➢ Scale & Resilience
➢ Valuations…..

42. Key Learning
42
All things being equal…
The differentiator is
“Behavior” and
“Inference”

43. ❖ www.platts.com
❖ www.steelmint.com
❖ www.lme.com
❖ www.mcxindia.com
❖ www.zauba.com
❖ www.mining.com
❖ www.steel.gov.in
❖ www.businessinsider.com
❖ www.screener.in
www.google.com
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Sources