Dolly Khanna appears to be a believer in Peter Lynch’s theory that investors should buy what they know. Dolly is obviously a lover of sea food like Prawns, Shrimps etc.
Her recent purchase of a massive chunk of Avanti Feeds, a manufacturer of shrimp feeds etc, was probably dictated by her taste buds. When Avanti Feeds surged and turned into a 5-Bagger, Dolly has turned her attention to IFB Agro.
In the July to September quarter, Dolly Khanna has scooped up a chunk of 1,27,412 shares of IFB Agro. At the CMP of Rs. 286, her holding is worth Rs. 3.64 crore.
According to an “initiating coverage” report from Angel Broking dated 22nd March 2013, IFB Agro Industries (IFB) is primarily present in West Bengal and is engaged in the business of manufacturing alcohol, bottling of branded alcoholic beverages as well as processed and packed marine foods, both for domestic and export markets. It is emphasized that IFB is a major player in the marine business (90% prawns) in West Bengal with presence in domestic as well as export markets. The company also has a tie-up with Thailand’s C.P. Group for supply of feed to farmers. Angel advised a buy on the basis that there is huge potential for IFB Agro’s marine business, given its strong customer base, rising demand for frozen sea food, and overall global economic growth which again will spur demand.
Now, the surprising part is that the steep rise in IFB Agro’s stock price as well as its expansion plans appears to have spooked Angel. In their latest report, they have stated that they are “discontinuing coverage” of the stock. They say:
“IFB stock price has run up in the past few days generating returns in excess of 100% since we initiated our coverage on the company on March 22, 2013 at Rs. 151. The company has announced capex of Rs. 350cr over the next 3-5 years (relatively huge compared to its current market cap of Rs. 296cr) which will result in no dividends being paid over the next two years. The company had undertaken restructuring measures to improve its EBIT margin by selling its IMFL brands and adding capacity but it has failed to achieve the desired results. We are not confident that the large capex will be able to generate ROCE above 20% going forward. At 8.0x its FY2016E PE, we believe that the stock is reasonably valued but the risk-reward ratio remains unfavorable. Hence we discontinue our coverage on the company (from October 9, 2014).”
In this scenario, we are in a difficult position. On the one hand, it cannot be denied that Dolly Khanna’s latest stock picks like Avanti Feeds, RS Software, Mold-Tech Packaging and Premier Explosives have all been dancing to the tune of her magic wand and giving incredible gains to its shareholders. However, at the same time, we cannot ignore the sensible advice offered by Angel Broking that the risk-reward ratio is not in favour of an investment.
Maybe discretion is the better part of valour at this stage.
What is your opinion? Do share!