One of my favourite theories is that if more than one savvy investor has taken a liking for a stock, it is almost certain that the stock will shower hefty gains on its lucky shareholders.
This theory has been proved to be infallible time and again.
One recent instance is that of Sterling Tools. I diligently reported a few days ago that Dolly Khanna and Anil Kumar Goel have reposed great faith in the stock. Since then, the stock is surging like a rocket.
Yet another instance is GHCL, the small-cap engaged in the manufacture of specialty chemicals and textiles.
In an earlier piece, I pointed out that GHCL has a number of savvy investors rooting for it. In addition to heavyweights like Ashish Kacholia and Sanjoy Bhattacharyya’s Ocean Dial Gateway Fund, GHCL has attracted eminent stock pickers such as IndiaNivesh Securities, EOS Multi Strategy Fund and Morgan Stanley.
However, having eminent stock pickers expressing confidence in a stock is not enough. There must be a credible research report which explains the nuts and bolts of the stock and why it is a compelling buy.
GHCL satisfies this requirement as well. We noted earlier that Emkay has conducted a masterful analysis of the innards of GHCL and has explained what makes the stock tick.
When the stock was Rs. 171 on 22nd June 2016, Emkay confidently predicted that the stock would surge to Rs. 228 on the basis that GHCL is at “neglected valuations” which does not take into account the “strong fundamentals”.
What is appreciable is that Emkay was not deterred by the fact that GHCL had already (at that time) clocked in a magnificent return of 230% in 24 months and 131% over 12 months.
Today, the target price of Rs. 228 predicted by Emkay is history. The stock is standing tall at Rs. 259.
The reason for the euphoria is because GHCL reported block buster Q1FY17 results. The sales surged 17% while the operating profit surged 41%. The net profit surged an impressive 67%.
| GHCL LTD – Q1FY17 FINANCIAL RESULTS | |||
| PARTICULARS (Rs CR) | JUN 2016 | JUN 2015 | % CHG |
| NET SALES | 684.82 | 582.52 | 17.56 |
| OTHER INCOME | 3.08 | 2.11 | 45.97 |
| TOTAL INCOME | 687.9 | 584.63 | 17.66 |
| TOTAL EXPENSES | 491.48 | 445.28 | 10.38 |
| OPERATING PROFIT | 196.42 | 139.35 | 40.95 |
| NET PROFIT | 102.83 | 61.62 | 66.88 |
| EQUITY CAPITAL | 100.02 | 100.02 | – |
The robust results have increased Emaky’s confidence that GHCL is on the right track and has the wherewithal to deliver more bumper gains to shareholders. They have again recommended a buy and increased the target price to Rs. 280.
As always, the logic is flawless:
“Upgrade FY17/18E EPS by 8%/5% respectively; Upgrade target price, maintain BUY
We have upgraded our FY17/18E EPS by 8%/5% respectively as we advance our revenues estimates on the back of improving volumes for soda ash and textiles business. Further, higher operating efficiency in organics chemicals segment and lower interest cost will result in higher PAT growth. We assign higher target multiple of 7xFY18E EPS (from earlier 6x) as we see strong visibility of earnings and improvement in return ratios supported by sustained reduction in debt. We reiterate BUY recommendation with revised TP of Rs 280 based on 7x FY18E EPS of Rs 40.”
Emkay’s prediction is like sweet music to the ears of Sanjoy Bhattacharyya, Ashish Kacholia and the other ace stock pickers as they prepare to welcome the massive gains that is effortlessly flowing into their coffers!
Even after identifying early, couldn’t buy into owing to promoters history.
I agree. SEBI barred the promoters for falsifying shareholder records. Very dubious management. One cannot invest when the captain of the ship can steer the crew into a storm, no matter how shiny the ship.
Dear Arjun, I would also like to bring to your notice that there is another company which has brought stellar results, announced just a couple of days ago. Star Paper Mills. YOY sales jumped by 13.1%, EBIDTA jumped from 5.4 crores last year (FY16) to 16.6 crores in Q1 this FY (207%), mainly due to reduction in input costs. Q1 PAT jumped from 3.9 crores last year to 12.76 crores this year or 223%. The company’s strategy of planting trees for captive use, adopted some years ago, seems to have paid off. FY 15 Annual Report has a note by the management that they have a total coverage of trees covering 1,32,000 hectares. Also, as per the Report, this strategy enhances the rural income as well as facilitate sustained availability of raw material to the company. The ROCE and ROE as calculated by me for FY16 comes to 35% and 26% respectively. This old company belonging to the Duncan Goenka Group was lossmaking till a couple of years ago, steadily improving operational effeciency, using captive wood, and decreased interest cost. The company does not have long term borrowings, only Rs. 6.6 crores ST debt. Its MCap is 123 crores as compared to its topline of 272 crores as of FY16. The FV 10 rupee stock quotes at 78.8 as on 17/8/2016, up from Rs. 39, just 3 months ago. Are we looking at a potential multibagger here?
Venky good analysis, definitely calls for a look
55% of promoter holding is pledged. I don’t know if it’s for ST borrowing or not. Anyone here can help ?
Yeah, I too have noticed the pledging. I just did a small lookup when the shares were pledged. It was during the times when the company was in heavy losses. And the share prices at that time 2013-14 was in the range of six to ten rupees. So to raise a crore of rupees a huge number of shares require to be pledged, which would not be the case if it was today. I am not sure if the pledging was for benefit of the company, but definitely the company is on the growth track. From an EBIDTA of minus 28 crores in 2011-12 to plus 27.5 crores in FY16. And this Q1 it is 17 crores already.
Honestly to me GHCL doesn’t look promising, it is expensive as compared to performance it delivered.