Multibagger gains are made when investors take advantage of bad quarterly results to buy stocks at throwaway valuations
Porinju has made it amply clear that his investment modus operandi is to wait for companies with a good business model to report poor quarterly results. When the stock price plunges, Porinju pounces on the stock and grabs a truckload at throwaway valuations.
Porinju has explained this philosophy in articulate terms:
“Here I have a love towards bad numbers when it comes to quarterly numbers. That is where I have made most money for my investors and myself. Some good businesses, some worth business, great companies when they report a quarter or two bad numbers and the market participants react very severely and it goes down sometimes 30-40 percent that happens in not a sophisticated economy or stock market. I feel that is a great opportunity because we cannot judge a company by a quarter or two or may be sometimes one year numbers.
Today most market participants in India they are looking for numbers. If they don’t see numbers they will throw away their shares and that is an opportunity for a smart stock pickers. There can be temporary challenges for some industry wise because of the bad environment for the industry or the general economic environment or may be company specific temporary issues. So, mostly some companies, some great businesses worth holding for next ten years or five years such companies report a quarter or two bad numbers I think that is where you make multi baggers.”
Porinju keeps reminding his followers to learn to love bad quarterly numbers reported by good companies:
Investors monkey jumping on Qtr nos, look at this: Shreyas Shipping was 200 on bad Q3 & 400 on good Q4. I love bad nos. of good companies!
— Porinju Veliyath (@porinju) June 8, 2016
Monkey-jumping on Qtrly numbers: sell Federal Bank @ 40s on bad Q4, buy @ 80s on good Q2 after 6 months!
Think beyond Qtrs #ValueInvesting
— Porinju Veliyath (@porinju) October 26, 2016
Buying such stocks is “safe” as per theories of Howard Marks & Shankar Sharma
I have earlier drawn attention to the wisdom of leading investment thinkers like Howard Marks and Shankar Sharma.
Howard Marks explained that such stocks are “safe as a house” because investors have little expectations from them and the risk of an incremental disappointment is low. On the other hand, even a small improvement in operating metrics can send the stock rocketing into orbit.
Shankar Sharma canvassed the same philosophy when he let us in on his “five fail-proof mantras to finding multibagger stocks”.
Shankar emphasized that he loves buying stocks which are abandoned by investors at their throwaway valuations. In fact, he claimed to among the handful who bought multi mega-bagger stocks like Amazon.com and Apple.com when they were written off by investors.
Porinju Veliyath’s latest stock pick: Kokuyo Camlin
Porinju practices what he preaches. Yesterday, Kokuyo Camlin reported dismal quarterly numbers. The loss for Q2FY17 surged to Rs 3.7 crore from a loss of Rs 0.6 crore in the same quarter last fiscal. The total income slumped 0.2 percent to Rs 129.6 crore. The EBITDA loss was Rs 0.7 crore.
As expected, the stock price tanked. However, while other shareholders were wringing their hands in despair, Porinju was rubbing his hands in glee.
This was the moment he was waiting for. He rushed to Dalal Street and bought a massive chunk of 582,375 shares of Kokuyo Camlin at Rs. 82.56 each for Equity Intelligence, his PMS fund. The total investment in the stock is Rs. 4.80 crore.
Kokuyo Camlin is one of Porinju’s old favourite stocks
The surprising aspect is that Kokuyo Camlin happens to be one of Porinju’s old favourite stocks. He recommended a buy of the stock in June 2014 on the logic that it is the “Cheapest MNC consumer co at 1X sales!”.
Kokuyo Camlin @ 47 | MktCap-475 Cr. Cheapest MNC consumer co. at 1X sales! Consolation, capacity expansion, exports. looks good for 2 years!
— Porinju Veliyath (@porinju) July 23, 2014
Porinju expressed confidence that Kokuyo Camlin would do well in future as Kokuyo, the Japanese behemoth, would focus on the Indian operations and improve margins and capacity.
@gvv_jagadeesh margins, capacity and stock price – all will go up from current levels. Indian operations going to be in focus for Kokuyo!
— Porinju Veliyath (@porinju) July 23, 2014
Ramesh Damani also recommended Kokuyo Camlin as a “low-risk, good-return” stock
Ramesh Damani, one of the most astute investors on Dalal Street, appears to have recognized the potential of Kokuyo Camlin even earlier than Porinju.
He recommended a buy of the stock in the following words:
“So one stock we tend to like in the space which the market seems to have forgotten and I own this stock is Camlin. It has around 300-crore market cap and owing to the hard work that the stock has done, the Japanese have come and taken a stake in this company at about Rs 110 per share.
The stock is available on the screen at Rs 40 per share for some unknown reason. The company has been disappointing for the last four quarters, but that will change over time, at least looking at what Kokuyo Camlin, who has taken Camlin, suggests. It says it wants to increase the turnover of this company from 400 crore to roughly 1000 crore over the next few years. So it suggests better times ahead for the company. So it is a low-risk, good-return type of investment.”
Ramesh Damani’s portfolio sparkles with Kokuyo Camlin
Ramesh Damani also practices what he preaches. As of 31st March 2016, he held a chunk of 375,000 shares of Kokuyo Camlin. His present holding is not known.
Stock recommended by Anand Rathi
Anand Rathi has conducted an indepth analysis of the affairs of Kokuyo Camlin and recommended a buy. Their investment rationale is worth noting:
-Kokuyo Camlin Limited is over 80 years old company started in 1930s. Over the years, the Company has become synonymous with quality products for schools, offices and niche art markets. The Company has two of the most recognized and endearing brands in the country – CAMEL and CAMLIN.
-In 2012, Kokuyo S&T Ltd. Japan acquired majority stake in Camlin and rechristened the company as Kokuyo Camlin Limited. Kokuyo is a Japan based company with more than 100 years old history. It is a leading marketer in stationery, institutional furniture and catalogue sales and has presence in many countries in Asia.
– In 2013, the company has embarked upon anambitious mission to build up its capacities, capabilities and competencies and had raised funds for construction of state of the art manufacturing plant at Patalganga Industrial Area of MIDC. The construction has already started in January 2015 and management expects this plant to be operational by 2016.
– We expect CAMLN to further improve its profitability in years to come and continue to grow its business through its existing product franchise as well as launch of new innovative products from its parent company
With Indian stationery market expected to grow at around 10% per annum in years to come due to increase in literacy rate, rising discretionary expenditure amongst other, CAMLN stands as one of the key beneficiaries.
– The company’s cost rationalization process, upcoming new integrated plant and extensive dealer networks are expected to drive volumes and margins going ahead for the company.
– At CMP (then Rs. 109) the stock is trading at 1.6x FY16E and 1.3xFY17E EV/Sales.
– We recommend BUY on Kokuyo Camlin Limited with a target price of Rs. 135 per share.
Promoter holding is 74.99%
The holding of the promoters (Kokuyo Company Limited, Japan and the Dandekar family) stands at 74.99% as of 30th September 2016.
Of the balance 25.01%, a number of ultra-HNIs (including Ramesh Damani) control a big chunk of the equity. Upto 16.68% is widely spread over 17,162 individuals.
The upshot is that the stock has low liquidity which can work out to the advantage of investors owing to “supply scarcity” and “mis-pricing” of the stock.
Buy-back/ Delisting possibility?
When Kukuyo Japan stormed in to buy a majority stake in Camlin, there was speculation that it would make an open offer to buy back the rest of the shares and delist the company. However, that has not materialized so far.
It may be recalled that Ricoh India, also a subsidiary of a Japanese behemoth, has already attempted delisting on two occasions.
If the delisting plans for Kukuyo Camlin ever come up for discussion, one can be sure that the stock will surge to the stratosphere.
Technical Analysis of Kokuyo Camlin
According to an expert in technical analysis, Kokuyo Camlin has “formed a base” and is “ready to shoot” to a target price of Rs. 140 in the next few months.
Kokuyo Camlin is a forming a base & ready to shoot in coming weeks. Buy with SL 75, Target 140. TF: 4 months pic.twitter.com/nCvES9p5E6
— Prashant Tejura (@prashanttejura) September 20, 2016
What is the “inflection point”/ “trigger point” for Kokuyo Camlin?
It is obvious that merely buying a stock languishing at low prices is not sufficient. The stock must have an “inflection” or “trigger” which will drag it out of poverty and into riches.
To my untrained eye, the commencement of production at the “Integrated Manufacturing Plant at Patalganga” may be that trigger.
The said new integrated manufacturing plant at Patalganga is expected to commence production in H2 FY2016.
It is claimed by the Company that “Consolidating some of our manufacturing activities at Patalganga will catapult us into the next orbit as economies of size, scale and scope unlock immense new potential in procurement, logistics, production and delivery.”
It is also stated that “The Patalganga plant has locational advantages with excellent connectivity with national highway, proximity to JNPT and the proposed site for the new airport.”
The new plant is said to be spread over 56,600 sq.mts. (14 acres) of land and will be “the largest stationery plant in the Kokuyo Group”.
It is also stated that “The Patalganga plant shall also be equipped with the latest machines and equipment. It shall be a state-of-the-art manufacturing unit with cutting-age technology and advanced automated production lines.”
It is promised that “The plant will immediately take our manufacturing efficiencies to the next level in terms of volumes as well as quality of products, not to mention the compelling cost advantages derived from single-location production.”
So, prima facie, Kokuyo Camlin is likely to start a new phase in its life once the ambitious Patalganga unit starts production.
Repeat of Linc Pen success?
I have pointed out earlier that the duo of Ramesh Damani and Porinju Veliyath are also bullish on Linc Pen, a micro-cap also engaged in the stationary business.
Porinju enjoyed great success with Linc Pen because the stock spurted soon after he bought it.
Linc Pen @ 100 | MktCap 140 Cr – to post 550 Cr revenue in 2 yrs with higher margins; could be valued at 1.5 times sales – not for traders
— Porinju Veliyath (@porinju) September 3, 2014
Linc Pen up 44% in two days:https://t.co/NOgyBY19kN
— Porinju Veliyath (@porinju) November 18, 2014
As of date, Linc Pen has a market cap of Rs. 384 crore.
In the past, Porinju has shown an awesome sense of timing. He bought stocks like Biocon, Jubilant Life, Kalyani Steel etc when they were languishing and were at an “inflection point”. The stocks surged soon thereafter and became multibaggers. Whether Porinju’s luck holds in the case of Kokuyo Camlin and whether he will be able to reap hefty gains from the stock requires to be seen!