Report date: May 2015

It's not all about maximising the upside

Welcome to the May 2015 issue of Microcap Millionaires.
It was yet another lacklustre month on both the broader stock markets as well as the portfolio level. While the
Sensex fell by around 3% during the last one month, the decline in the portfolio was lower at around 2%.
While this outperformance may not sound as exciting as witnessing gains, please note that it is no less important
in our aim to outperform the indices by a significant margin over the long term. On the contrary, it will work
immensely to our advantage if we are able to keep up with the indices during good times and lose a lot less
during bad times. The reason behind this is simple. The bigger the decline the higher the gains needed to make
up for the loss.
For e.g. a stock that's down 50% one year and up 50% the next will still be down 25% overall. Worse still, it will
need a gain of more than 60% to just to come to par with a stock that's up a modest 10% each for two
consecutive years.
Stock A

Stock B

Year 1

-50.0%

10.0%

Year 2

50.0%

10.0%

75

121

Rs 100 invested is now...

As a result, we would happily take a result where we are underperforming the indices by a small margin during
times when markets are buoyant. This is provided we lose a lot less than the benchmarks in times of a deep
correction.
Fortunately, we have the structure in place to ensure exactly such a result. Firstly, our portfolio is adequately
diversified so that even if few stocks underperform massively, it does not hurt the portfolio much on a broader
level.
Secondly, theres always certain part of the portfolio in cash and cash equivalents and whose weightage rises as
the risks to the portfolio rise in terms of the overall valuation. To explain further, when markets are expensive,
nearly 3/4th of the portfolio is in cash and when they are cheap and conducive for gains, only 1/4th of the
portfolio is in cash.
We hope youve realised that this arrangement has been done pretty much with the intention of protecting the
downside more than trying to capture the maximum upside.
Please note that not trying to capture the maximum upside doesnt mean well recommend stocks that will go up
just 10%-12% each year. Just one look at the gains weve helped our subscribers book in the last 15 months or
so will give you an idea of how even the upside can be tremendous.
Indeed, some of the positions we closed have given returns of the order of 545%, 175%, two gains of 170%
each, 150%, 135% etc all in a span of one year, give and take a couple of months. While we certainly dont think

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Equitymaster Agora Research Private Limited

103, Regent Chambers,1st Floor, Above Status Restaurant, Nariman
Point, Mumbai - 400 021 Tel (Board Line): 022 - 6143 4055
Report date: 20 May 2015

every stock pick of ours is going to give such stellar returns, there will be enough stocks that will do well so that
overall returns from this service turn out to be very good from a long term perspective.

On that note, let us see in detail the performance of the service during the month gone by and also since
inception.
Our portfolio over the last one month
Our current portfolio of stocks i.e. the stock only portion decreased in value by about 5.7% during the
past month. The BSE Sensex fell by 2.8% during this very same period. We will continue to reiterate here
that one must not attach a lot of weight to performance during a span as short as a month. Do note that this
standard warning of ours will be put forth to you, as it always has, both when we stack up favourably as well as
not so favourably with the index.
Looking at things on an overall basis in terms of the total funds dedicated to this service, i.e. once we
include the fixed deposit component, we were down about 2.0% over the course of the preceding month.
Considering the nature of this method of investing, our fixed income component is as much a part of the overall
strategy as is our stock component. Thus, this will always be a more appropriate way of measuring our
performance.
Our performance since inception
After taking into account declines in the last one month, the total portfolio (including the fixed income
component), is up a strong 63.8% since inception. This is significantly better than the returns achieved
by the Sensex, which is up by about 34.6% during the same period. This thus takes the total
outperformance vis-a-vis the Sensex to around 29%.
Do note that when we talk about the performance since inception, it would effectively include the gains not only
from interest income earned out of the money put in fixed deposits, but also the gains made on the 9 positions
that have been closed since inception. Thus the appreciation of around 64% in the value of our total capital since
inception
takes
into
consideration
both
these
elements
of
our
performance.
As far as closed positions are concerned, cumulatively, they have given returns of the magnitude of
173% with the median return being as high as 150%!
Performance review
As for individual stocks making up the portfolio, there was only one gainer during the month. This was
Maharashtra Seamless that saw its share price go up by 5.2%. Unfortunately, all the other open positions ended
in the red. The biggest losers were HCL Infosys, Venus Remedies and SAIL, down 21%, 17% and 13%
respectively.
Swelect Energy retained top slot as the highest gainer since inception amongst all the stock still in open position.
Then theres Gujarat Industries and Power and Technofab Engineering in the pecking order. While Swelect is up
126% since the date of recommendation, Gujarat Industries Power and Technofab Engineering are up 41% and
21% respectively.

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Equitymaster Agora Research Private Limited

103, Regent Chambers,1st Floor, Above Status Restaurant, Nariman
Point, Mumbai - 400 021 Tel (Board Line): 022 - 6143 4055
Report date: 20 May 2015

As things stand today

Turning to the current status quo, we have about 15 stocks in our portfolio as of now. Out of these, as you can
see in the table, there are about 14 stocks that can still be bought at current prices (marked in green) for those
of you who haven't been able to yet.
If you've already invested in these stocks, unless you increase the total funds allocated to this service, we don't
recommend any further buying as it may disrupt the individual stock weightage and perhaps also the overall
stock/bond allocation.

Summary of the Equities Portfolio...

Name of stock
Venus Remedies

Buy
FY14 book value
Price to
Current price* % change
Current view
price
per share (Rs) book value (x)
219

163

-26%

400

0.41 Buy at current prices

Gujarat Industries Power

59

83

41%

116

0.71 Buy at current prices

Peninsula Land

31

27

-14%

55

0.49 Buy at current prices

HCL Infosys

37

42

13%

77

0.55 Buy at current prices

253

571

126%

674

0.85 Buy at lower prices

74

75

1%

105

0.71 Buy at current prices

197

165

-16%

269

0.62 Buy at current prices

Globus Spirits

81

49

-40%

120

0.40 Buy at current prices

SAIL

75

67

-11%

105

0.64 Buy at current prices

Jindal Drilling

162

167

3%

260

0.64 Buy at current prices

Dredging Corporation

421

382

-9%

508

0.75 Buy at current prices

Kakatiya Cement Sugar

114

115

1%

222

0.52 Buy at current prices

Technofab Engineering

134

162

21%

202

0.80 Buy at current prices

Maharashtra Seamless

200

212

6%

417

0.51 Buy at current prices

36

41

13%

114

0.36 Buy at current prices

Swelect Energy Systems

GSFC
Gujarat Alkalies and
Chemicals

Kanoria Chemicals &

Industries

*Current prices for existing companies are as on 19th May 2015

The one stock that has not become explicit 'SELL' yet has been indicated as 'Buy at lower prices' in the table.
So keep a watch out for its price over the next month and if you see them fall lower to a price to book value of
0.80 or below, you may take exposure in it provided you don't already have it in the portfolio.
The one stock that has not become explicit 'SELL' yet has been indicated as 'Buy at lower prices' in the table.
So keep a watch out for its price over the next month and if you see them fall lower to a price to book value of
0.80 or below, you may take exposure in it provided you don't already have it in the portfolio.
The table includes the each company's FY14 year end book value so as to give you a ready reference
to be able to gauge when the stocks marked as 'Buy at lower prices' fall below 0.80 times their book
value. Do take advantage of any market declines that happen in the interim period before our next issue to buy
the stock that falls to such levels.

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Equitymaster Agora Research Private Limited

103, Regent Chambers,1st Floor, Above Status Restaurant, Nariman
Point, Mumbai - 400 021 Tel (Board Line): 022 - 6143 4055
Report date: 20 May 2015

Further, if you want to book partial profits in the stocks marked 'buy at lower levels' and that have risen
the most since your purchase, you may very well do so and effectively take some of your money off the
table. But do keep the stock bond allocation as close to 50% as possible.
As far as we are concerned, we are in no hurry to SELL just yet.
With this, we come to the end of this edition of the Microcap Millionaires. In case you have any queries, please
feel free to write into us.

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Equitymaster Agora Research Private Limited

103, Regent Chambers,1st Floor, Above Status Restaurant, Nariman
Point, Mumbai - 400 021 Tel (Board Line): 022 - 6143 4055
Report date: 20 May 2015

Please note that we will start to show the returns these stocks have achieved till date in the above table once
we complete building the portfolio in the next issue.
Warm Regards,
Team Equitymaster
Rahul Shah is the Co-Head of Equitymaster research team and is also the Managing Editor of our
micro cap initiative, Microcap Millionaires. He has led the team from the front in developing some
of our most stringent and rewarding research processes. As per his own admission, the turning point
in Rahul's life as a financial analyst came a few years back when he got introduced to the works of
Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality
business with powerful moats and strong management teams. Charlie Munger on the other hand
inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters
across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to
do the big things right and possess a great temperament and a contrarian streak.

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Equitymaster Agora Research Private Limited

103, Regent Chambers,1st Floor, Above Status Restaurant, Nariman
Point, Mumbai - 400 021 Tel (Board Line): 022 - 6143 4055
Report date: 20 May 2015

Where Microcap Millionaires Fits In

We recommend that investors should decide their exposure to equities,
which is only one part of the overall investment portfolio, after they have
kept aside some cash. While we are no experts in wealth management,
we believe keeping aside some safe cash is absolutely necessary. Not
only will this cash take care of your liquidity needs, but it will also come
handy during market declines. Particularly when there will be
opportunities to pick up fundamentally strong stocks at cheap
valuations. For some of you, this cash component could be 6 months of
usual monthly expenditure, for others 36 months. You need to decide
what amount works for you, and then set it aside. Maybe in a FD, or in a
pure liquid fund. Or maybe just cash at home!
Having decided what portion of your overall portfolio will be in equities, it is time to decide the allocation of stocks within your
equity portfolio.
As your experience will tell you, stock markets tend to be very volatile. And putting too much money in a single stock or
sector can be very risky. That is why we recommend to our subscribers to have a well-diversified equity portfolio comprising
the appropriate proportion of micro & small caps, mid cap and large cap/ blue-chip stocks. Based on their relative riskiness,
we have created an asset allocation pyramid that can help you in deciding how much money you should invest in a stock.
However, it must be noted that the allocation levels could differ from person to person depending on the risk appetite.
Micro cap stocks are inherently more risky compared to blue-chip or mid cap stocks. On the brighter side, they present a
huge growth potential. It is not unusual for a good micro cap stock to turn a multi bagger in a matter of months. But on the
flipside, there is a high risk attached.
We'll tell you straightaway that not all micro cap stocks tend to be outperformers. In fact, we have seen micro cap stocks
plunging 80-90% when things turn sour. That is the reason micro caps are not recommendable to those having a low risk
profile. Even for investors having an appetite for slightly more risk, not more than 10% of one's portfolio should be invested
in micro cap stocks. This means that the corpus that one sets aside for the microcap millionaires service should not be more
than 10% of the total money allocated towards equities.

Definitions of Terms Used

Buy recommendation: This means that the investor could consider buying the concerned stock at current
market price keeping in mind the tenure and objective of the recommendation service.

Hold recommendation: This means that the investor could consider holding on to the shares of the
company until further update and not buy more of the stock at current market price.

Buy at lower price: This means that the investor should wait for some correction in the market price so
that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of
the service.

Sell recommendation: This means that the investor could consider selling the stock at current market
price keeping in mind the objective of the recommendation service.

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Equitymaster Agora Research Private Limited

103, Regent Chambers,1st Floor, Above Status Restaurant, Nariman
Point, Mumbai - 400 021 Tel (Board Line): 022 - 6143 4055
Report date: 20 May 2015

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014

INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007.
Equitymaster

is

joint

venture

between

Quantum

Information

Services

Private

Limited

(QIS)

and

Agora

group.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on
various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:

For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:

a.

Equitymaster has financial interest in the subject company.

b.

Equitymaster's Associates, Research Analyst or his/her relative do not have any financial interest in the subject company.

c.

Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more
securities of the subject company at the end of the month immediately preceding the date of publication of the research report.

d.

Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of
publication of the research report.

DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:

a.

Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.

b.

Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the
past twelve months.

c.

Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage
services from the subject company in the past twelve months.

d.

Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or
merchant banking or brokerage services from the subject company in the past twelve months.

e.

Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in
connection with the research report.

GENERAL DISCLOSURES:

a.

The Research Analyst has not served as an officer, director or employee of the subject company.

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Equitymaster Agora Research Private Limited

103, Regent Chambers,1st Floor, Above Status Restaurant, Nariman
Point, Mumbai - 400 021 Tel (Board Line): 022 - 6143 4055
Report date: 20 May 2015
b.

Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.

Definitions of Terms Used:

a.

Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in
mind the tenure and objective of the recommendation service.

b.

Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update
and not buy more of the stock at current market price.

c.

Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought
at more attractive valuations keeping in mind the tenure and the objective of the service.

d.

Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the
objective of the recommendation service.

Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

Equitymaster Agora Research Private Limited. All rights reserved.

Disclosure:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research
Company. The Author does not hold any share in the company/ies discussed in this document. As on date of release of
this Report, Equitymaster does not hold shares in the mentioned company/ies. However, Equitymaster will invest Rs
50,000 in the mentioned company/ies 10 trading sessions after date of the release of the Report. Please read our
detailed Share Trading Guidelines here.
Disclaimer:
This document is confidential and is supplied to you for information purposes only. It may not (directly or indirectly) be
reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the
consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use
by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where
such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would
subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document
is inadvertently sent or has reached any individual in such country, especially, USA, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment
objectives, financial situations, or needs of individual investors. Our investment recommendations are general in nature
and available electronically to all kind of investors irrespective of subscribers investment objectives and financial
situation/risk profile. Equitymaster does not provide any portfolio management/advisory service and is not registered as
such under the SEBI (Portfolio Managers) Regulations, 1993. Before acting on any advice or recommendation in this
document, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek
professional advice. The price and value of the investments referred to in this material and the income from them may
go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future
performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed
to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions
expressed are our current opinions as of the date appearing in the material and may be subject to change from time to
time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any
security in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for
any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any
investment decisions based on this document.

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