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Ircon International Limited, formerly Indian Railway Construction Company Limited (IRCON), is an engineering and construction, specialized in transport infrastructure. Incorporated in 1976, IRCON International Limited (IRCON) is four-decade old government company (under the ministry of railways). It is engaged in the business of engineering and construction mainly specializing in major projects including railways, highways, bridges, flyovers, tunnels, aircraft maintenance hangars, runways, EHV substations, electrical and mechanical works, commercial and residential properties, development of industrial areas and other infrastructure activities. IRCON provides EPC services on a fixed-sum turnkey basis as well as on an item-rate basis for various infrastructure projects. In 2016, IRCON was ranked 248 in the list of the top 250 international contractors by Engineering News Record (ENR) of the United States. Presently it has 26 project offices and five regional offices to support and manage its business operations throughout India and five overseas project offices in Sri Lanka, Bangladesh, Malaysia, South Africa, and Algeria to provide onsite support overseas.
IRCON International (IRCON) – a Mini Ratna company incorporated by the Ministry of Railways – operates in the entire spectrum of infra services including railways, highways, electrical, metro and buildings etc. It provides EPC services on a fixed-sum turnkey basis as well as on an item-rate basis for various infrastructure projects and also undertakes projects on BOT model. It has been demonstrating superb execution over last four decades and current order book at Rs224bn provides healthy visibility, going forward.
As per the Govts divestment target of Rs800bn in FY19, IRCON is divesting ~10% stake by offering 9.9mn shares via Offer for Sale (OFS) at a price band of Rs470-475 to raise Rs44.7bn at the upper end of the band. Consolidated PAT of Rs4.1bn for FY18 translates into an attractive PE of 10.9x.
There has been a steep price correction in listed infrastructure companies over last 3-4 months on the back of prevailing concerns over the reversal of interest rates, persistent delay in land acquisition despite higher compensation and funding constraints. We believe price offering by IRCON factors in all. Further, IRCON appears to be insulated with a higher interest rate scenario with no leverage.
Key Investment Arguments
Superior Execution & Diversification Advantage
Healthy Growth Visibility on Robust Order Book
Light Working Capital Entails Healthy Cash Generation
Likely Expansion in RoE
Key Risks
Adverse Change in Policies relating to Railways Investment
Execution Delay
Substantial Rise in Input Cost & Other Overheads
Outlook & Valuation
IRCON's earnings (Rs4.1bn PAT in FY18 vs. Rs5.6bn in FY15) have not witnessed any growth in last 3 years despite witnessing consistent growth in order book mainly led by margin contraction and shrinkage in overseas revenue.
However, it has maintained a healthy dividend payout ratio (>45%) over the years, as it pays out either 30% of PAT or 5% of Net Worth (whichever is higher) as dividend.
Further, considering healthy returns generated by NBCC and RITES (which are broadly infrastructure space being government companies), we feel IRCON's valuation at 10.9x FY18 earnings looks attractive and may not disappoint the investors.
It's never a good idea to recommend an oil marketing stock, when crude prices are climbing. However, diesel and petrol prices are now aligned to market rates, which does not impact stocks like HPCL too much. Of course, if the government asks oil marketing companies like HPCL, BPCL or Indian Oil to absorb the crude hike, our recommendation could go haywire. Assuming that it does not, the shares of Hindustan Petroleum are an excellent bet at the current prices. The shares are now at a 52-week low of Rs 252.20, which makes the shares attractive.
Solid growth
The company over the last five years has seen its net profits surge from Rs 1,100 crores in FY 2014 to Rs 7,128 crores in FY 2018. Last year the company rewarded shareholders with a solid bonus of 1:2 and dividends, which takes the dividend yield to as high as 8 per cent. HPCL has the second largest pipleline in the country and is the largest lube manufacturer. There are reports that HPCL may takeover MRPL, which if it happens, will make the company the second largest refiner after IOC.
Solid expansion plans
HPCL has lined-up some massive expansion plans to spend around Rs 75,000 crores over the next 5 years. This would include capacity addition at Mumbai and Vizag, expansion of gas pipeline network and a 5 mmtpa liquified natural gas regasification terminal coming up at the Chhara port in Gujarat. The company has also been rewarding shareholders with solid dividends and bonus issue in the past few years and there is reason to believe that the same would continue.
Concerns
There are concerns, that rising crude prices, pose a threat. At the moment, petrol and diesel prices are de-regulated, which deflects any concern, but, if the government intervenes, than it could pose a problem. There are also worries that electric vehicles, may lower the demand for petrol and diesel vehicles. At least for the next 5-10 years, we see little room for worry, with petrol and diesel vehicles likely to continue to grow at a franctic pace, given how expensive electric vehicles are.
Valuations
HPCL is also very cheap on valuations. The stock at Rs 255, is trading at just 5.4 times, the 2018 EPS of 47.2. This is really low for a company that has a solid retail network. The HPCL stock is a good bet at the current market price of Rs 255. Investors may buy and hold the shares for the long term.
Veteran investment adviser and writer R Balakrishnan shares some interesting pointers in a concise format.
Management quality is a function of ethics and governance. Someone asked me how important are these two attributes?
If we go by ‘equity research’ reports, it has absolutely no importance. No report comments on the quality of the management, preferring to be diplomatic or practical, since most sell side firms need some business in banking or equities to come their way.
Equity research as a function has never made money on its own. It is like the appendix in the human body. Of course, it comes in to play when we want to acquire a company or take a significant stake in a company. Then we will all perhaps spend a lot of time figuring out who the owner is and what are his strengths and weaknesses.
Sometimes, I see large institutional investors taking significant stakes in companies where the management quality is known to be suspect. I can only infer that it is perhaps a reflection on the quality of the investor also. Institutional investors are managed by people who get salaries and bonuses and they are not investing their own money.
Most of us seem to think that it will not impact the investment. We think that by the time the bad qualities come to the fore, we would have cashed out our gains. Or we think that with so many other investors, we are not alone. We always seek for this comfort that we are not alone.
Governance and ethics of the highest standards are something that exist only in seminars and books. When it comes to money, there are shades of grey everywhere. The one thing working in favour of the investors is that most often, the businessman is also interested in maintaining a perennially north bound share price and hence our interests are aligned.
In the old days, when salaries of directors were restricted to a few thousands, there we no ESOPs or ‘preferential allotments’ or ‘warrants’, the story was different.
Also, the interest rates used to be high and our markets were small. Stocks never got such fancy valuations as what exist today. So, the promoter found it useful to take money away and leave just enough for the shareholders.
Today, with the fancy valuations the stock markets give, the promoter finds that keeping a rupee inside the company adds substantially to his wealth. And the promoter can take his multi-crore salaries, dilute when the price is right, issue warrants to himself when the timing is good etc.
There are so many indulgences that have become legal now.
Thus, the promoter has less reasons to skim off. A higher EPS translates in to significant wealth, given the benevolent secondary markets. Of course, no one is immune to a structured fraud. That can happen to catch the best of investors unaware.
Satyam Computers was one. Of course, the investors got lucky there since there was a motivated attempt to rescue the company in order to bail out a select few. However, I do not see the same things happening in a Gitanjali Gems.
However, there are ways to stay safe: Avoid companies with high debt, unusual amounts of cash in hand combined with low dividend payouts, continuous raising of capital, constant mergers and acquisitions, having hundreds of subsidiaries, having too many ‘associate companies’ (associate companies are where there is no disclosure, since there are external persons who are co-owners) etc.
Avoid in general companies where ‘revenues’ are based on some funny accounting or on ‘certification’ by management rather than plainly visible ones. Have a look at the schedule of Fixed Assets (nowadays referred to as ‘non-current assets) and look at what is happening there.
Is there too much of fictitious assets like Goodwill? Is too much invested in real estate? Too much goodwill? All of these are just warning signs and call for deeper probe rather than just ignoring or accepting.
Many edifices are built of papier-mâché. Kicking the tyres by going through the schedules of accounts for a few years will be a good habit to keep. Other thing that has helped me is to have a binary classification for valuation- companies that have brands or consumer products to be valued on basis of revenue. Companies that deal in commodities etc to be valued by Balance Sheet.
In essence, I find out what the company can make and how much of assets are needed. Then compare it with the “ENTERPRISE VALUE” (enterprise value is the sum of market capitalization PLUS debt). That helps me to buy when the industry is doing badly and sell when it is doing well.
Of course, the approach is simplistic, but a great starting point. Management integrity always pays off handsomely over time.
If you are taking chances, taking it knowingly. And be prepared for surprises. There is no early warning signal as to when a fraud will be exposed.
P.S: A good analyst can always smell the cockroaches. No investor has the patience to listen to someone ranting about it.
Financial services firm IIFL Holdings will demerge its finance, wealth and capital business into three separate entities and list them on bourses in a year, a top official of the company, backed by Canada-based Fairfax Financial Holdings, said. This is part of the company's strategy to reorganise the corporate structure in a changing business environment as organisation now sharply focus on their expertise in niche verticals, IIFL Holdings Founder and Chairman Nirmal Jain said. The demerger, followed by listing will involve three units -- IIFL Finance (loans and mortgages); IIFL Wealth (wealth and asset management) and IIFL Securities (capital markets). "World over, investors and regulators are favouring corporate structures to change from control-oriented close- knit conglomerates to innovation and idea-driven independent enterprises. Incumbent players are being challenged by new entrants like never before. "The reorganisation will prepare IIFL group companies for the growth opportunities amidst intensifying competition in coming decade," Jain told PTI. Each company, when listed separately can attract and motivate its key people with stock options, Jain said, adding a clean corporate structure with no cross holdings will ensure transparency, highest governance standards and compliance. "By separating them, we will allow them to grow to their full potential," he added.
Fairfax will be the "most significant" non-promoter shareholder in all the three companies, he said.
"The reorganisation process requires multiple approvals and can take 10-12 months. However, the scheme will be effective from the appointed date," Jain said further. As per the existing shareholding structure, promoters have 28.9 per cent stake in IIFL Holdings, Fairfax holds 35.3 per cent, company's employees 4.4 per cent while others have the remaining 31.4 per cent.
Post demerger, the proposed shareholding of IIFL Finance will result into 23.4 per cent stake by promoters, employees 7.7 per cent, others 25.5 per cent, Fairfax 28.6 per cent and CDC Group 14.8 per cent. IIFL Wealth will have promoters' stake of 15.7 per cent; employees 26.7 per cent; others 17 per cent, Fairfax 19.2 per cent and General Atlantic 21.4 per cent. In IIFL Securities, promoters will hold 28.9 per cent; Fairfax 35.3 per cent; employees 4.4 per cent and others 31.4 per cent. Currently, IIFL Holdings' loans and mortgages business has an asset under management of Rs 27,288 crore; wealth and asset management unit manages over Rs 1.28 lakh crore from over 10,000 high networth families and while the capital market business has 40 lakh customers serviced from more than 1,200 locations. The reorganisation will result in an equity shareholding mix where the owner of seven shares of IIFL Holdings will get seven shares of IIFL Finance, seven shares of IIFL Securities and one share of IIFL Wealth. IIFL Holdings has registered an increase of 32 per cent in its consolidated net profit at Rs 235.76 crore in third quarter ended December of this fiscal, against Rs 179.07 crore in the same period a year earlier.
The return-hungry investors who are always looking for stocks which could give multibagger returns normally end up picking up stocks which either don’t perform or even if they perform they would give returns less or equal to benchmark returns. Being able to spot a potential multi-bagger stock early definitely requires some research, along with that, patience plays a key role. Such stocks do exist, and if you have already done your research then the ideal time to pick them is on every decline. Here are a few parameters that can help you spot a potential multibagger stock early – focus on the growth rate of the industry including future growth potential, which would benefit the stock under consideration. Apart from that if there are entry barrier that would prevent competition. High-quality management is an added advantage and is like a precondition for the creation of long-term wealth for investors, suggest experts. The other measure to look at is financial ratios. “Although not strictly defined, but a consistent low debt-to-equity ratio, high returns ratio, and free cash flows are some of the key indicators we have seen in the multibaggers in the last decade,” said, Nidhi Agrawal, an analyst at Angel Broking Here are 10 mistakes as highlighted by different experts which one should avoid making when hunting for stocks which could potentially give multibagger returns: 1.Herd mentality: Many investors fall victim to following stock tips by friends, neighbours and so-called experts. These picks rarely work out. In order to make money in equities, the conviction is necessary in an investment, which leads to the ability to hold on to a stock holding through volatile times and sell-offs. If an investor does not understand a business, he should not invest in the company. If an investor is unwilling to put in the time to research equities, then they are better off letting professionals manage their portfolios. 2.Investing in stocks based on low price: Just because a stock price is low does not mean that the stock is an attractive investment. I have surprisingly met clients that make the mistake of equating low price to cheap. I once met a client that would only purchase stocks selling less than a certain price. However, even a stock selling at Rs 15 can be incredibly expensive while a stock selling at Rs 1,500 can often be cheap. Low price does not mean an attractive investment. 3.Holding on to losers: If a stock is down, there is a reason it is trading lower. It is best to regain losses by moving the money to an attractive investment. Investors often make the mistake of being unwilling to take a loss on a position. However, if you think about investing logically, it is clear that if a stock has sold off, there is a reason it has done so, and it may never reach back the same levels or may take a long time to do so. In many scenarios, the investor would be much better off putting money in an attractive alternative investment that would give them a better chance of recouping the loss. Most importantly, avoiding and minimizing crippling losses is a discipline many investors don’t follow. 4.Investing at high P/E multiples: An investment return is often determined by the price paid. At 100 times P/E, for instance, an investor is paying 100 times the trailing earnings over the past 12 months of the company. That is an awfully expensive price. It means it will take the investor 100 years to make back his investment. Very few stocks are able to deliver the growth that justifies this sort of a premium. Therefore, the valuation paid is crucial in determining future returns. 5.Investing in risky bets: Investors want to make money quickly and take larger speculative bets. These bets often lead to large losses. I have come across many investors that have bet on so-called sure shots, home runs, multibaggers. In my experience, the vast majority of these investors end up taking losses. These companies often have been hyped up by people on the street that are looking for suckers to pile in. There are many ways that investors are taken advantage of, and it is up to the investor to recognize the dangers and work with an experienced advisor. 6.Focusing more on macro data than on stock fundamentals: Blind investment in equity without looking much into the stock specific fundamentals should be avoided. 7. Just going with the hot picks or flavor of the season: They both need to be analyzed before investing for the earning potential of the company/industry dynamics. 8.Overlooking corporate governance issues: With the number of scams and frauds coming up, one needs to do best possible due diligence for the corporate governance of the company. 9.Over-allocation/under allocation to particular stock: While asset allocation is highly subjective and varies from person to person, a prudent investment strategy says that the allocation should be in line with the conviction and risk appetite of the investor. 10.Discontinuing monitoring of stock/key variables: Once an investor has taken a position in the stock, he/ she needs to regularly monitor the investment thesis, changing variables etc. to understand whether it is on the right track. Next Read :Fine Organic Industries IPO Review
Fine Organics is coming up with an IPO. The company is based in Mumbai and incorporated in 2002. Fine Organics is a manufacturer of oleochemical-based additives. They are leading producers of specialty additives for foods, plastics, rubbers, paints, inks, cosmetics, coatings, textile auxiliaries, lubes and several other specialty applications. They have products facilities at Ambernath, Badlapur and Dombivli in Maharashtra. They are 64300 tonnes production capacity as per 2017 reports. They have over 500 full time employees on payroll. They have strong R&D capability and developed over 46 new products since 2014.
Fine Organic Industries, a chemicals firm has fixed a price band of Rs 780 to Rs 783 per equity share to raise around Rs 600 crore through an initial public offering (IPO). The offer for sale will see divestment of 25 per cent of stake of 76,64,994 equity shares by the existing shareholders. The issue will open on June 20 and closes on June 22. The 48-year old company held entirely by the promoters family had filed draft papers with markets regulator Sebi to float the IPO in February.
It has three manufacturing facilities in the suburbs of the megapolis, including Ambernath, Dombivli and Badlapur, with a total installed capacity of about 64,300 tonnes per annum (tpa). "The company has drawn up capital expenditure of Rs 270 crore to expand capacities over the next 2 years and has already invested Rs 70 crore towards equity portion," Fine Organics CFO and director Tushar Shah told reporters at the IPO roadshow here.
The company is expanding its Ambernath facility by adding a capacity of 32,000 tpa at a cost of Rs 130 crore, and it plans to fund 30 per cent from equity and 70 per cent from debt, he said. It is also looking at investing Rs 55 crore in setting up Fine Zeelandia facility in Mumbai in association with Dutch family-owned Zeelandia International, a part of the Royal Zeelandia group, he said.
The company clocked net revenue of Rs 581 crore for the nine-months period ended December 2018. It has launched 387 products and exports accounts for 65 per cent of the total revenue, Shah added. Meanwhile, as part of the global expansion plans, it is also setting up a joint venture firm named FineAdd with the German partner Adcotec, to own and operate a 10,000 tpa facility in in Leipzig, Germany, which will be operational by Q3 FY20, according to the offer document. Fine Organic will own 50 per cent and Adcotec will own the other 50 per cent, it added.
Highlights of the Company:
a. Consistent market leadership position in the Indian mutual fund industry; b. Trusted brand and strong parentage; c. Strong investment performance supported by comprehensive investment philosophy and risk management; d. Superior and diversified product mix distributed through a multi-channel distribution network; e. Focus on individual customers and customer centric approach; f. Consistent profitable growth; and g. Experienced and stable management and investment teams.
Main object of the issue is: The objects of the Offer for the Company are to achieve the benefit of listing the Equity Shares on the Stock Exchanges and for the sale of Equity Shares by the Promoter Selling Shareholder. Further, the Company expects that the listing of Equity Shares will enhance its visibility and brand image and provide liquidity to its existing shareholders.
Positives For the Company:
Largest Producer of Oleochemical-based Additives in India.
Company is the largest manufacturer of oleochemical-based additives in India and one of the few large players in global oleochemical-based additives industry.They are one of six global players in the food additives industry and one of five global players in the plastic additives industry.Company has a huge first-mover advantage in India, alongside various other competitive advantages over other global players. This gives Company an advantage in pricing products competitively and allows them to provide stiff competition to new players. Hence, no major domestic or global player has set up a manufacturing facility in India.
Specialised Business Model with High Entry Barriers.
There are multiple entry barriers for a new entrant in the global oleochemical-based additives industry, such as product formulations, process technology and customer stickiness to established players. As a result, they are one of the few large global players in this industry.Because of high Entry barriers, Company is able to obtain higher EBITDA and profit margins for their products compared to other manufacturing industries where barriers to entry are lower.Company’s EBITDA margins were 18.54%, 22.11%, 18.43% and 17.78% for Fiscals 2015, 2016, 2017 and the nine months ended December 31, 2017, respectively.
Diversified Customer Base with Long Term Relationships with Marquee Customers.
Company has 603 direct customers and 127 distributors (who sold than more than 5,000 customers). Company’s direct customers are multinational, regional and local players manufacturing consumer products, such as Hindustan Unilever and Parle Products, and petrochemical companies and polymer producers globally.Company has an extensive distribution network in India and worldwide, enabling their products to be sold in 67 countries.
Diversified Product Portfolio Catering to a Variety of High Growth Industries.
As at December 31, 2017, they had a range of 387 products sold under the ‘Fine Organics’ brand, used in the (a) plastic industry and (b) food industry and others (cosmetics, printing inks, coated papers, lube additives, wires and cables, coatings and other specialty applications) industries.
IPO Particulars:
IPO Opens on : 20 June 2018 IPO Closes on : 22 June 2018 Issue Type: Book Built Issue IPO Issue Size: 7,664,994 Equity Shares of Rs 5 aggregating up to Rs [.] Cr Face Value: INR 5 per share Price Band: INR 780-783 Per Equity Share Minimum Order Quantity: 19 shares Listing will at: BSE,NSE Shares offered to Anchor – 22,99,497 Shares = 180.05Crore QIB – 15,32,999 Shares = 120.03Crore NII – 11,49,750 Shares = 90.03 Crore RII – 26,82,748 Shares = 210.06Crore (Lot size: 19 = 1,41,197 Forms) Total Issue – 76,64,994 Equity Shares = 600.17 Crore
Financials: Consolidated Figures
EPS for 2016-17 : INR25.56 EPS for 9M of 2017-18 INR 26.38 PE Ratio on EPS of 2016-17 : 30.63 RONW for 2016-17 : 24.65% RONW for 2017-18 9M : 17.34 % NAV as on 31.12.2017 :INR 114.65 Upper PBV : 6.83
Fine Organics Financial:
Rs. in Crore
Revenue
Expense
PAT
2013
497.5
466.6
20.9
2014
574.2
479.6
61.7
2015
616.5
530.9
57.1
2016
667.7
550.8
76.2
2017
792.7
671.8
77.7
2018 (9M)
594.7
500.2
58.5
Company Promoters:
Prakash Damodar Kamat
Mukesh Maganlal Shah
Jyotsna Ramesh Shah
Jayen Ramesh Shah
Tushar Ramesh Shah
Bimal Mukesh Shah
Peer Company Comparison :Galaxy Surfactants : Face Value : INR 10 Price : Rs. 1299 on 13 June 18 Total Income : INR 2171.70 Crore PE : 34.7x NAV :INR 161.51 P/NAV: 8.05
Tentative timeTable: 13 June 18– Price Band announced 19 June 18 – Anchor List 27 June 18– Finalisation of Basis of Allotment 28 June 18– Unblocking of ASBA 29 June 18– Credit to Demat Accounts 2 July 18– Listing on NSE & BSE
Fine Organics IPO Lead Managers:
Edelweiss Capital Limited
JM Financial Consultants Private Limited
Company Address:Fine Organic Industries Limited Fine House, Anandji Lane Ghatkopar (East), Mumbai 400 077 Phone: (91 22) 2102 5000 Fax: (91 22) 2102 8899 Email: investors@fineorganics.com
In the first divestment of the current fiscal, the government is selling 12% stake in railway consultancy firm RITES to mobilise about Rs 460 crore, with the price band fixed at Rs 180-185 per share. All retail investors and employees of the company will get a Rs 6-per-share discount on the final IPO price. The IPO will open on June 20 and close on June 22, the company said on Tuesday.
In February last year, finance minister Arun Jaitley had announced in the Budget that the government would divest stakes in at least three railway assets which included IRCTC, IRFC, IRCON. RITES was added to the list of divestment target later on. Even Rail Vikas Nigam, another PSU under the railways may soon launch its IPO, having obtained the regulatory nod last month, merchant bankers said. Through the RITES IPO, the government is selling 2.52 crore equity shares, including 12 lakh shares reversed for its employees. For fiscal 2019, the government has set a divestment target of Rs 80,000 crore. In fiscal 2018, the government had mobilised a little over Rs 1 lakh crore through PSU sell-offs.
RITES Limited is promoted by President of India. The company is a Gov. of India Enterprise. They work under Indian Railways. RITES Ltd is a 9001:2008 company and work a multi-disciplinary consultancy organization in transport, infra and related technologies field. They work a links with local consultants for overseas projects. They are expertise in quality assurance and transport infrastructure consultancy provider.
They have clients which includes Indian Railways, NTPC, SAIL, Rashtriya Ispat Nitam Limited, HPCL, Bharat Coking Coal Limited, Metro Link Express for Gandhinagar and Ahmedabad Company Limited (MEGA), Airports Authority of India, Titagrah Wagons, Cimco Ltd, Rajdeep Buildcon Pvt Ltd, Geokno India Pvt Ltd, ARK Services and more. The company looks good and it will be good to see how it will perform as other government companies not able to perform well except Midhani Ltd. RITES Ltd IPO Review:
Most of us are aware of the conventional stock picking metrics; visionary promoters, good management, scalable business and rich ratios.
Stock investor Soumya Malani suggests that investors get more specific in their hunt for alpha. The CEO of ShareBazaar App, he tweets at @insharebazaar.
Here, We narrow down on some patterns that investors could keep an eye on.
Look at the negative working capital pattern.
At first blush that sounds a bit off since negative working capital would signify a company’s liabilities outweighing its assets. This puts the company in a feeble light. But that’s not what I am focusing on. Negative working capital also means the business which operates on Other People's Money, or OPM, or the suppliers money. Advances from customers is a good hint to go by.
Companies which are leaders in a niche area and have a tiny market cap.
If you have the patience to wait for the business to grow and the market to subsequently realise its potential, you are sitting on a huge multi-bagger. This reminds me of the domestic consumption story. If one looks back at the market-cap of Cera Sanitaryware, Symphony or La Opala, it’s clear they were just too miniscule when compared to the scale they catered to, with an efficient supply chain and distribution network in place. Eventually, tailwinds prevailed, and the market catapulted them into a different orbit.
Keep an eye on acquisitions and takeovers.
Uniply and Kingfa are cases in point, each over-30 baggers in the last 3-4 years.
In retrospect, Kingfa was a common-sense choice. This Chinese giant grew from nothing to be Asia’s largest compounder and boasted a track record of 65% CAGR for 22 long years in China. When it saw its market getting saturated in China, it acquired an Indian company (then known as Hydro S&S) by paying 3x premium to its prevailing market price. This increased the efficiency and the stock became a huge multibagger.
Eradication of non-core diworsification.
A company could sport a sturdy and profitable core business, but owing to loss making non-core units, the overall Balance Sheet and Profit and Loss statement would be a farrago of misrepresentation. A shrewd move would be to sell those units and plough back the funds into its core business which would further accelerate growth. The market loves such stories.
Companies that outperform during huge headwinds.
TV Today is a classic example. Barring the Aaj Tak parent, every single company in the media sector was bleeding profusely. Digitisation was a game changer with the stock becoming a 12 bagger in last 4-5 years. Find companies which are making money when others from the same sector are unable to find their feet.
Demerger in a sizeable company.
A billion-dollar market-cap company can demerge a unit with a ratio of 20:1 share. The demerged entity, as per the ratio would quote at say $100 million which would make no sense for foreign investors. Foreign institutional investors, or FIIs, have got a market-cap stipulation and hence they tend to sell out in haste without even caring about the intrinsic value. Arvind Infra and Marico Kaya are examples of huge value creation.
Companies eating market share of market leaders.
Amara Raja and Havells ruthlessly cannibalized on the market share of leaders such as Exide and Crompton Greaves, respectively. Fifteen years ago, they were known to none with very thinly traded volumes. The upstarts are now the numero uno players in their own space.
Second-run companies in sectors where the leader has been a multibagger.
This is a very interesting pattern which often gets played out in different sectors. At some time, the valuation of the significant player gets so stretched that investors start to look for the trivial peer where the valuation gap is much narrower. Think Avanti-Waterbase, Relaxo-Mirza and KRBL-Chaman Lal.
Strong leverage but very efficient in working capital management.
Often, quality niche players backed by visionary pedigrees, to conquer more ground and stay undisputed would resort to capital expenditure through long-term debt. At some time, the capex would be covered for the next 3-4 years and just the maintenance capex remains. So, all operating cash flow goes in debt repayment and net profit vaults.
Legacy companies witnessing the induction of a new generation.
The predecessors were habituated in siphoning off aka black money but the new players at the helm, who in all probability would be freshly groomed from renowned business schools, would be inclined to look at the market cap which is pure white stuff.
It's simple math. A small-cap promoter may siphon off Rs 5 crores via unscrupulous means. On the flip side, the next generation would consider showing the same through books of accounts. That same amount would mean an extra Rs 100 crores in market cap considering a PE of 20. On even a 50% ownership they get richer by Rs 50 crores. No prizes for guessing which is a better route. Presently, I believe that this area offers serious money-making opportunities and moves likes demonetization further reinforces my stand.
Next Read : The Capital Asset Pricing Model: an Overview
