First of all, we have to familiarize ourselves with Jatin Khemani’s profile.
Jatin Khemani has had a brilliant academic career. He is a MBA (Finance) and CFA (USA) with 5 years of experience in value investing. He is now the Managing Partner at Stalwart Investment Advisors, a SEBI-Registered Investment Advisor.
To check Jatin’s track record in investing, we have to go across to his blog. There, one can see that he has several winning stocks to his credit such as Nesco, VST Tillers, PTC Finance, Ashiana Housing, Relaxo, Honda Power, V-Mart. Each of these stocks has posted handsome gains. However, Jatin has also had his fair share of misses. One instance is where he opines that tile stocks are not a good investment. This is an error of omission because we know how tile and sanitaryware stocks have sprakled. One can see that Jatin has by and large adopted a conservative stance and preferred sensible stocks which are growing at a steady pace.
Jatin’s latest stock pick is Amrutanjan Health Care, the micro/small cap company with a market capitalisation of only Rs. 596 crore. He has issued a detailed research report in which he has made several excellent points on why Amrutanjan has the potential to give us multi-bagger returns in the foreseeable future. The key points made by Jatin in his research report can be summarized as follows:
(i) Amrutanjan is in a strong financial position. It is debt-free and holds Rs ~50 Cr. in cash and cash equivalents. Its’ reported RoE is 16%. However if one adjusts for low-yielding cash and equivalents, the RoE is an impressive ~25%;
(ii) It is the leading brand in Tamil Nadu with a 35% market share;
(iii) The management has demonstrated a clear intent to take advantage of its brand image and distribution strength to introduce new products. The company has introduced several new products in the categories of ‘Body Pain’, ‘Congestion management’ and ‘Healthcare Management’. It has also started a new product line in juices. The addressable market size for such products runs into thousands of crores across India and the rest of the World;
(iv) An indication of the management’s seriousness to scale up their operations can be gauged from the fact that the budgeted Advertisement & Promotion spend in FY15 is ~18 Cr which is a healthy ~12% of FY15E revenues and a 65% jump over FY14’s A&P spend;
(v) The Company has the wherewithal to increase its sales and revenue because it already enjoys a ‘brand pull’ and also has a sizeable distribution chain of 1,800 Distributors and 2,50,000 Retail Outlets.
|Numbers reflecting improvement: Q2FY15 & H1FY15|
|Q2FY15||YoY Change||H1FY15||YoY Change|
|Net Sales (Rs Cr.)||40.9||24%||66.4||21.4%|
|Gross Margin (%)||64.4||50 bps||60.7||73 bps|
|OPM* (%)||14.9||111 bps||9.7||21 bps|
|PAT-M (%)||10.0||100 bps||7.3||155 bps|
*Excl. Other Income
Jatin has made several other excellent points in his report. He emphasizes that the current year will be a “landmark year” in Amrutanjan’s history as this year is witnessing significant pick up in the sales of new products that were launched over the last few years.
He also points out that there will be hardly any capex as the installed capacity is sufficient to take care of incremental growth over the next 3-4 years. This implies that the business is going to generate a lot of free cash.
On the all important aspect of valuations, Jatin points out that the valuations (at the then price of Rs. 288) at P/E of 16.8x FY16E and 1.85x EV/Sales is “very reasonable”, especially bearing in mind that Emami paid 5x Sales for Zandu. Jatin adds that Amrutanjan has land at a prime location in Chennai plant which is worth about Rs 250 Cr. The land is/ will be unused and there is a possibility that the Company may sell it. This provides further margin of safety, he says.
At the end, Jatin recommends a buy on the basis that Amrutanjan has good growth prospects, strong balance sheet, free cash flows and margin expansion potential.
There is a ring of truth in Jatin’s advice especially when you consider the fact that Vijay Kedia has bought 609,865 shares (worth Rs. 24 crore) of Amrutanjan in the December 2014 quarter. Knowing Vijay Kedia’s skill in finding winning multi-bagger stocks, we need to give Jatin Khemani’s recommendation serious consideration.