Dolly Khanna and Rajiv Khanna: Unveiling Their Investment Journey

About Dolly Khanna and Rajiv Khanna

Dolly Khanna, a well-known name in the world of investing, is often celebrated for her stock-picking prowess. However, what may surprise many is that Dolly Khanna is, in fact, a homemaker. The real driving force behind their successful investment journey is her husband, Rajiv Khanna. Rajiv Khanna, a Chennai native, holds a unique position in the investing landscape, preferring to invest under his wife's name. For quite some time, business channels were unaware of Dolly Khanna's identity, even though her name appeared in the shareholder lists of various companies.

Rajiv Khanna's journey into the world of investments began with humble origins and a solid educational foundation. He studied engineering at IIT Madras and gained professional experience at two different companies before venturing into entrepreneurship. His business, Kwality Ice Cream, eventually became profitable and was sold to Hindustan Unilever. 
The proceeds from this sale served as the seed capital for his investing journey. Known for his media-shy nature, Rajiv Khanna has kept his investment style closely guarded over the years. However, he recently shed some light on his investment journey and strategy during the Tamil Nadu Investor Association's (TIA) annual 'Bullet Proof Investing' seminar.

Portfolio Holdings and Investment Journey

Rajiv Khanna's investment journey has been a rollercoaster ride with its fair share of ups and downs. He began by purchasing shares of Satyam, a company that gained notoriety for India's largest corporate fraud until 2010. Interestingly, his decision to invest in Satyam was influenced by the fact that his neighbor's son worked at the company, making it an intriguing choice at the time. During the dot-com bubble, he saw substantial gains from his investments in Satyam and other tech stocks. However, when the bubble burst, he also suffered significant losses. Despite the downturn, he managed to come out with a net gain.

This initial success allowed him to continue investing through the 2003-2007 rally, again witnessing substantial profits but also experiencing losses during the global financial crisis of 2008. In 2016-17, Khanna capitalized on the surge in mid-cap and small-cap stocks but faced some losses when market cycles turned.

Fast forward to the COVID-19 pandemic, Rajiv Khanna opted to sell a substantial portion of his portfolio early, driven by panic. He exited the market in March 2020 and was cautious about re-entering even as markets began to recover. He diversified his investments into gold and Chinese assets, considering their attractive valuations.

Investment Strategy

1. Rajiv Khanna's investment strategy is characterized by a diversified portfolio of 500 stocks. He maintains a disciplined approach, monitoring the 30-day daily moving average (DMA) of his holdings. 
If a stock falls below this moving average, he chooses to sell the position, while he holds onto stocks trading above their 30-day DMA. This systematic approach allows him to exit the market before potential bubbles burst, especially in the small- and mid-cap segments.

2. Until 2018, Rajiv Khanna enjoyed the flexibility of entering and exiting stocks in the short term without significant tax concerns. However, the tax landscape changed in 2018, leading him to set off short-term capital gains with long-term capital gains. 
Worried about the possibility of the income tax department classifying his trading as business income, which cannot be adjusted against capital gains from other years, he sought a solution in mutual funds. Mutual funds offer tax advantages, with taxes payable only upon redemption.

3. While Rajiv Khanna has started allocating some of his funds to mutual funds, he remains cautious, believing that most mutual funds practice buy-and-hold investing. He's more interested in actively managed funds that engage in rapid buying and selling, seeking alpha. Quant Mutual Fund schemes align with this strategy, characterized by high churn rates and relatively small corpus sizes.

A Case for Actively Investing

At a time when passive investing gains popularity, Rajiv Khanna makes a compelling case for active investing. He cites Warren Buffett's approach, highlighting that Buffett's portfolio turnover is higher than commonly believed, especially in his early years. Buffett himself acknowledges the advantages of active management, particularly for smaller portfolios. Khanna also draws inspiration from legendary fund manager Peter Lynch, known for managing a large number of stocks with a high turnover ratio.

Fun Fact

Rajiv Khanna's investing journey is a testament to the idea that successful investors don't always fit the traditional mold. He began with curiosity, embraced a systematic approach, and adapted to changing market conditions, all while maintaining a low profile.

Reduced Positions in Four Stocks by Rajiv Khanna

Dolly Khanna has been actively managing her portfolio, and recent data reveals that she has reduced her stakes in four small-cap stocks over the past two quarters:

1. Nitin Spinners Ltd

Dolly Khanna reduced her stake from 1.5% in the quarter ending September 2022 to 1.3% in the quarter ending March 2023.

Weaknesses:

a) Increased Debt Levels: Nitin Spinners Ltd has witnessed a significant increase in its debt levels, primarily due to the drawdown of term debt for a large-sized debt-funded expansion project and increased working capital utilization. As of March 31, 2023, the company's debt stood at ₹980 crore, up from ₹689 crore in the previous year. This higher debt load has led to a moderation in capital structure and debt coverage indicators.

b) Moderation in Debt Coverage Indicators: Key indicators such as PBILDT interest coverage and total debt to PBILDT have deteriorated in FY23 compared to the previous year. PBILDT interest coverage dropped from 11.77x to 7.88x, and total debt to PBILDT increased from 1.06x to 3.30x in FY23. The company anticipates that the total debt to PBILDT will remain above 3.50x in FY24.

c) Implementation and Saleability Risk: NSL is currently executing a large-scale debt-funded expansion project, which carries inherent risks related to project implementation. Any delay in execution may lead to cost overruns and disrupt expected cash flow timelines. Additionally, the saleability of the expanded capacity is vulnerable to shifts in the demand for cotton yarn, which can be influenced by international demand-supply dynamics and economic cycles.

d) Volatility in Raw Material Prices and Forex Exposure: NSL's production heavily relies on raw cotton, which accounts for approximately 80% of its production costs. Raw cotton prices are subject to volatility driven by factors such as weather conditions, government policies, and global demand-supply dynamics. This volatility can result in inventory losses or gains. Moreover, since the company derives a significant portion of its revenue from exports (56% in FY23), it is exposed to foreign exchange rate fluctuations. Although NSL employs forward contracts to hedge its forex exposure, there remains a minimal unhedged exposure.

e) Competitive and Cyclical Textile Industry: NSL operates in a competitive and cyclical textile industry characterized by both organized and unorganized players. The commoditized nature of cotton yarn limits pricing flexibility. The industry's profitability is closely tied to global macroeconomic conditions, affecting raw material and finished goods prices. Any shift in the global economic environment can impact the domestic textile industry.

Outlook: Stable

The stable outlook reflects NSL's ability to maintain its market position and operational efficiency. The expectation of an improved demand scenario suggests that the company will sustain its business risk profile over the medium term. Despite the identified weaknesses, NSL is poised to navigate the challenges and maintain its stability in the textile industry.

2. Chennai Petroleum Corporation Ltd

Her stake decreased from 2.6% in September 2022 to 2.1% in March 2023.
Weaknesses:

a) Project Implementation Risks: Chennai Petroleum Corporation Ltd is in the process of setting up a 9-million metric tons per annum (MMTPA) refinery project in a joint venture with its parent company, Indian Oil Corporation (IOCL), and other seed equity investors. The project's approved cost is approximately Rs. 31,580 crore, with planned debt-to-equity funding in a 2:1 ratio. CPCL's equity contribution amounts to around Rs. 2,570 crore, representing a 25% share. Any significant time or cost overruns in this project could increase CPCL's equity investment and impact its credit metrics. However, the risk is partially mitigated by the track record of the group in successfully implementing large projects.

b) Profitability Vulnerability: CPCL's profitability is susceptible to several external factors, including fluctuations in global refining margins, import duty differentials, and the exchange rate between the Indian Rupee (INR) and the US Dollar (USD). The company operates in an industry with limited pricing flexibility, and its margins are highly sensitive to changes in international crude oil prices and crack spreads. This sensitivity was evident in FY2019 and FY2020 when CPCL's margins contracted due to inventory losses and weak crack spreads.

Outlook:

Company is expected to give good quarter.

3. Tinna Rubber and Infrastructure Ltd

Dolly Khanna's stake dropped from 1.7% in September 2022 to 1.4% in March 2023.

Weaknesses:

a) High Exposure to Group Entities Through Corporate Guarantee: Tinna Rubber and Infrastructure Ltd has extended corporate guarantees for the bank facilities of its associate concerns, namely "M/s Tinna Trade Limited (TTL)" and "M/s TP Buildtech Private Limited (TPB)." This exposure to group entities may pose a credit risk. TPB, engaged in manufacturing construction chemicals, and TTL, involved in trading agro-commodities, have moderate financial risk profiles. For FY23, working capital facilities of both entities are backed by corporate guarantees provided by TRIL, amounting to Rs. 86.42 crore. The funded financial support to group entities remains a credit negative factor.

b) Project Execution and Stabilization Risk: TRIL has undertaken two capital expenditure projects with a total project cost of approximately Rs. 38.94 crore to enhance existing capacities and add new product profiles. The projects are funded through term loans and internal accruals. However, as of July 31, 2023, only around 13% of the total project cost has been incurred. The successful commencement of these projects within envisaged time and cost is critical to the company's credit profile. Post-implementation, risks associated with stabilizing operations and achieving the intended scale of business remain to be seen.

c) Foreign Exchange Fluctuation and Regulatory Risk: TRIL's business involves both imports and exports, exposing the company to foreign exchange rate fluctuations. While there is a natural hedge due to import and export operations, the absence of hedging policies makes TRIL susceptible to currency value fluctuations, potentially affecting its cash accruals. Additionally, government regulatory policies related to tariff and non-tariff barriers, anti-dumping duties, international freight rates, and port charges can impact the company's earnings. In FY23, TRIL registered a gain of Rs. 0.77 crore from foreign exchange fluctuations.

d) Raw Material Price Volatility Risk: More than 55% of TRIL's total production cost in FY23 is attributed to raw materials. The company recycles end-of-life radial (TBR) tyres, which contain recyclable content of rubber. This exposes TRIL to price volatility in natural/synthetic rubber (NR/SR). Price revisions are made quarterly based on input prices, creating a time lag in passing on raw material price changes. Sudden adverse fluctuations in raw material prices can impact profitability.

e) Dependency on Cyclical Industries: TRIL's fortunes are closely linked to road construction and tyre manufacturing companies, which depend on the infrastructure and automotive industries. Over 40% of the company's revenue in FY23 came from these sectors. These industries are subject to economic cycles and cyclical demand patterns, posing a risk to TRIL's growth during industry downturns. However, some risk mitigation is achieved through diversification into other sectors.

Outlook: Cautious

The "Cautious" outlook suggests that the entity may face challenges despite the extensive experience of the promoters and management in the industry. While it maintains established relationships with reputable customers, TRIL could encounter difficulties in sustaining the growth of its operations, preserving profitability margins, and successfully completing its ongoing expansionary capital expenditures. This may result in a more precarious credit risk profile in the near term.

4. Rama Phosphates Ltd

She reduced her stake from 1.7% in September 2022 to below 1% in March 2023, leading to her exclusion from the list of shareholders required to be disclosed by companies.

Weaknesses or Concern:

a) Volatility in Raw Material Prices and Foreign Exchange Rates: Rama Phosphates Ltd is exposed to fluctuations in raw material prices, such as rock phosphate and sulphuric acid, which are influenced by global market dynamics and changes in foreign exchange rates. This exposure is significant as RPL needs to maintain sufficient inventory due to the seasonal nature of the fertilizer industry, making its stocked inventory susceptible to price risks stemming from volatile raw material prices.

b) Operations Dependent on Agro-climatic Conditions: The operations and profitability of RPL's fertilizer division are sensitive to agro-climatic conditions, particularly the monsoon, as demand for fertilizers in India is greatly influenced by the monsoon season due to limited irrigation coverage. Additionally, the performance of its soya division is vulnerable to fluctuations in crop cultivation in the country.

c) Regulated Nature of Fertilizer Industry: The company's profitability is exposed to the adequacy and timeliness of these subsidies, which can sometimes fall short of ensuring sufficient profitability. Furthermore, the working capital cycle of the company is tied to the timing of subsidy releases by the GoI.

d) Modest Profitability of Soya Business: While RPL has experienced improved operating profit margins (OPM) in the last two years, primarily driven by its fertilizer and chemical divisions, the margins of its soya oil division continue to remain subdued due to limited value addition.

Outlook: Stable

The outlook for RPL remains cautious as it faces challenges associated with the volatility in raw material prices, dependency on agro-climatic conditions, and the regulated nature of the fertilizer industry. While the company has made improvements in profitability in certain divisions, the modest profitability of its soya oil business poses ongoing challenges. RPL will need to continue managing these factors to sustain its performance in the future.

Conclusion

Rajiv Khanna's investment journey, coupled with Dolly Khanna's stock-picking acumen, presents a unique perspective on the world of investing. Their experiences underscore the importance of adaptability, disciplined strategies, and the active management of portfolios, even in an era where passive investing gains traction. Investors can draw inspiration from their journey as they navigate the ever-changing financial markets.