Daljeet Kohli keeps a strict discipline when it comes to buying stocks. The fact that a stock has strong fundamentals is not reason enough to buy the stock if its valuations are not reasonable. It is for this reason that Daljeet has put a number of his all-time favourite stocks like Ajanta Pharma and Alembic Pharma on ‘hold’ despite stellar performance.
“… We are positive on the long term prospects of the company given its leadership position and its thrust to maintain this position. However, we remain cautious on the aggressive expansion plans, higher ad spends and teething issues in the new segments (sanitaryware and faucets). We maintain our SELL rating on the stock as valuations appear rich at current levels. We arrive at a revised target price of Rs 482 per share …”
However, in the latest report dated 28th October, Daljeet & Prerna have pointed out that Q2FY15 results are “Better than expectations”. After an analysis of the results, they say;
“We are positive on the long term prospects of the company given its leadership position and its thrust to maintain this position. We are positive on the execution capabilities of the company given the on-schedule commencement of the expansion plans. On-time execution of expansion plans is likely to result in return of 27.6% ROE in FY16E after an expected dip in FY15E at 25.4% from 27.9% in FY14. The outlook of the sector has become more robust given the government thrust on building new toilets, new government campaign of Swachh Bharat Mission and corporate participation in the mission through CSR activities. We arrive at a revised target price of Rs 635 per share by revising our target multiple upwards to 22x from 18x earlier on revised FY16E earnings estimate of Rs 28.9 per share. Accordingly, we revise our rating on the stock to HOLD from SELL earlier.”
It is noteworthy that investors who may have followed the ‘sell’ rating have not been put to any loss because the stock price has remained virtually flat at about Rs. 600 in the past few months. The stock will probably undergo a “time correction” on account of its rich valuations of 30.0x and 20.9x FY15E and FY16E earnings.