Virinchi Ltd – operating leverage from hospital will generate mega profits
Virinchi Ltd, a little know micro-cap with a market capitalisation of only Rs. 250 crore, was first discovered by Porinju Veliyath in August 2016.
Without a second’s thought, Porinju pounced on the stock and scooped up a massive chunk of 101,000 shares on 31st August 2016 in a bulk deal.
Later, on persistent requests from his battalion of fans and followers, Porinju explained the rationale for the stock pick in the following words:
“Virinchi hospital in Hyderabad is a 358 bed hospital, it is just getting operational now and they are talking about more and more expansion and the promoters have some two other hospitals privately held with 200 beds. That is also getting merged with this company and the promoter stake is going up to around 51 percent, that is also very positive. So, I am seeing many things happening in the organisation and it looks like an inflection point from a stock picking perspective.”
Porinju also did number crunching to satisfy the needs of his fans:
“At Rs 120-130 crore you are getting a company with already very good numbers, more than justifiable with the current market cap and in a big way they are growing into a futuristic business and hospital business, in India there may be some pockets, some cities which are overcrowded with hospitals. But generally speaking India is still in shortage of hospital beds, so that is where a lot of money can be made by investors.”
Porinju’s present holding in Virinchi is not known. However, the stock has done well since then by notching up hefty gains of nearly 30%.
Now it is the turn of Mudar Patherya to put the spotlight on Virinchi.
He has explained that the best part of Virinchi is the fact that the flagship hospital enjoys attractive operating leverage, which means as utilisation rises, the bottom line and RoCE (return on capital employed) pass throughs could be quicker.
Mudar has also done number crunching and pointed out that the fact that the Ebit of ~5.75 crore in the June 2016 quarter transformed to ~14.35 crore in the June 2017 quarter, despite an increase in depreciation from ~3.55 crore to ~8.13 crore, shows that the Company is doing the right things.
Orient Cement – new “animal spirit” discovered
Orient Cement has the distinction of being recommended by Porinju Veliyath in his world famous tweet of 29th August 2013 when it was quoting at a throwaway valuation of Rs. 32.
Balaji Telefilms@31, Orient Paper@5, Orient Cement@32, KRBL@23, Mirza Intl@20 – all looking penny stocks, but not penny business. BUY
— Porinju Veliyath (@porinju) August 29, 2013
The stock has since surged from Rs. 32 to 154, putting massive gains of 365% into the pockets of its lucky investors.
Unfortunately, the stock has been languishing in the recent past with a 24 month return of (-) 4% and 12 month return of (-) 22%.
Mudar claims that Orient Cement has now discovered a “new animal spirit” which is shown by the fact that the aggregate capacity goal outlined for 2020 has been achieved three years ahead of schedule.
He has also opined that there will be higher capacity utilisation across the next few quarters on the one hand coupled with the acquisition-led benefits kicking in.
Mudar has drawn a parallel between Orient Cement and its arch rival Dalmia Cement (a.k.a. Dalmia Bharat).
Dalmia Bharat has given a return of 330% over 24 months and 60% over 12 months, which implies that Orient Cement may walk on the same path and delight investors.
Dilip Buildcon – “Baby, there is something happening here”
Mudar has been charmed by Dilip Buildcon’s staggering quarterly results.
“Baby, there is something happening here,” he has exclaimed in an excited tone.
He has pointed out that the revenue has increased every single of the past four quarters – from ~916 crore to ~1,664 crore; Ebit has more than doubled from ~105 crore to ~238 crore; depreciation has increased from ~54 crore to ~65 crore; interest outflow has increased from ~96 crore to ~111 crore. The deduction: Interest outflow increased ~15 crore in the past four quarters; Ebit strengthened to ~133 crore.
This implies that Dilip Buildcon could be a powerhouse multibagger even from here despite the hefty YoY gain of 142% already notched up, Mudar says.
Axis Direct has confirmed Mudar’s hypothesis by recommending a buy for the target price of Rs. 765.
The rationale is convincing:
“Sale of BOT assets – right step forward
Dilip Buildcon (DBL) has signed an agreement with Shrem Group for sale of its entire BOT portfolio (14 operational, 4 under construction projects and 6 Hybrid Annuity Model (HAM) projects) at an equity value of Rs 16 bn and enterprise value of ~Rs 105 bn. DBL has invested (equity and sub-debt) Rs 6.8 bn in operational and under construction assets, while an amount of Rs 8.4 bn is yet to be invested. The transaction values BOT portfolio at ~1.05x book value.
The transaction is expected to be completed in tranches, wherein DBL would receive ~Rs 5.5 bn in FY18 and remaining in FY19, which would be utilized in strengthening the balance sheet (reduction of debt). With the monetization of BOT assets, DBL has delivered on its strategy of being a focused EPC player in infrastructure space.”
Phillips Carbon Black – megabagger with 563% gain over 24 months
Phillips Carbon Black has been an unstoppable juggernaut with a massive 500% gain over the past 24 months.
The stock was first identified by ICICI-Direct when it was still a “Nano Nivesh” quoting at Rs. 175.
The stock has since surged to Rs. 753, resulting in incalculable gains for ICICI-Direct’s followers.
The massive gains have not deterred ICICI Direct from expressing confidence that Philips Carbon has “further upside potential”.
The core logic is as follows:
“Improving operating matrix, re-rating to sustain, retain BUY
The operating matrix of PCBL is steadily on the uptrend with the company realising robust profitability at the P&L level in FY17. On the balance sheet side, the matrix is even more encouraging with PCBL generating ~Rs 358 crore as cash flow from operations and consequent retiring of debt to the tune of ~Rs 350 crore in FY17. It incorporates a steady improvement in net working cycle with net working capital (NWC) days coming in at 47 days in FY17 vs. 72 days in FY16. We expect the robust cash flow generation trend to continue with PCBL offering a cash flow yield of ~10% in FY17- 19E. On the return ratios front, PCBL clocked double digit return ratios in FY17 (first time in five year bloc of FY12-17) with RoE at 14% & RoCE at 16.5% (adjusted for revaluation reserve). We expect return ratios to further improve to ~25% at the RoE level and ~20% at the RoCE level over FY17-19E. Going forward, in FY17-19E, we expect sales to grow at 9.3% CAGR in FY17-19E while EBITDA is expected to grow at 14.0% CAGR in FY171-19E. Consequent EPS is expected at Rs 50/share in FY18E and Rs 55/share in FY19E. We value PCBL at Rs 825, i.e. 15.0x P/E on FY19E EPS of Rs 55.0/share. We maintain our BUY rating on the stock. We have been positive on the stock ever since our initiation under the Nano Nivesh brand (price level at Rs 175 levels). We believe there is a further leg up in the story with further upside potential in the stock.”
IDBI Capital has also jumped onto the bandwagon by issuing an initiating coverage report in which all the virtues of the stock are explained in crystal clear terms:
“Product mix and efficiencies to drive profitability
– Phillips Carbon Black (PCB) is the largest manufacturer of carbon black in India (46% market share by capacity) and seventh largest in the world.
– Rising tyre demand in India alongside production curbs in China (lower supplies) provide strong visibility on volume growth/margins for PCB.
– We expect PCB’s sales/EBITDA/net profit to grow at a CAGR of 14.5%/30.5%/93.4% over FY17-19E. Its net debt to EBITDA to improve from 2.6x in FY17 to 1.3x by FY19; return on equity is likely to improve from 6.5% in FY17 to 18.5% in FY19. Given these factors, PCB’s stock is currently trading at an inexpensive valuation of 10.5x/8.9x FY18/FY19 EPS.
– We initiate coverage on the stock with a BUY, Target price – Rs911.
Key Highlights and Investment Rationale
– Brownfield expansion with modest capex
PCB is expanding carbon black capacity by 66k tonnes via brownfield expansion (current capacity – 472k tonnes) with a modest capex of Rs1,700 mn by Q2FY19. Further, PCB is doubling its high-margin specialty grade carbon to 24k tonnes with a capex of Rs700 mn by Q3FY18. We expect volumes to grow at a CAGR of 4.5% over FY17-FY19E.
– EBITDA/tonne to expand on better product mix, efficiencies and volumes
We expect PCB’s EBITDA margin to expand on the back of improving operating efficiencies, higher volumes and better product mix in favour of non-rubber products. We expect EBITDA/tonne to increase from Rs7,438 in FY17 to Rs11,056 in FY19E.
– Initiate coverage with BUY; TP of Rs911
We believe PCB is in a sweet spot currently given rising tyre demand in India, competitive position in the international markets and improving product mix in favour of non-rubber products. The company’s credit profile is also likely to strengthen with higher free cash flows and falling net debt. The stock is currently trading at an inexpensive valuation of 10.5x/8.9x FY18/FY19 EPS. We assign a PE multiple of 12.0x to our FY19E EPS and derive a target price of Rs911.”
The target price of Rs. 911 projected by IDBI Capital makes it clear that more bucks are due from the stock given that the CMP is Rs. 754.
InterGlobe Aviation – highest ever profits recorded
InterGlobe Aviation a.k.a. Indigo needs no introduction to us given that the stock is strongly recommended by Rakesh Jhunjhunwala and Raamdeo Agrawal.
The company is a leader in the aviation sector and is on the road of prosperity given the plunging crude oil prices and the surging tourist traffic.
Mudar is impressed by the stellar results being reported by Indigo.
The Ebit has increased every single quarter of the past four quarters: ~238 crore to ~678 crore to ~697 crore to ~1,201 crore. Interest moved from ~76 crore to ~77 crore in the past three quarters; other income jumped ~30 crore (depreciation declined ~20 crore). This clearly implies that Indigo is doing well.
Axis Direct has also recommended a buy on sound logic:
“Records highest ever profit
InterGlobe Aviation (Indigo) reported its highest ever PAT of Rs 8.1 bn, driven by strong traffic growth (RPK growth of 25% YoY), improved load factor (88% vs. 83% in Q1FY17) and firming up of yields (up 2% YoY).
Management lowered its guidance for ASK growth in FY18 to 20% (22% earlier) on account of unavailability of sufficient replacement engines from P&W and delay in the delivery of A320 neos. However, the management is confident that P&W will be able to resolve the engine issues over the next 1 year.
Indigo is well placed to capture market share (currently at ~40%) led by its capacity expansion. Moreover, yields have stabilized, which should ease pressure on margin (which we saw in FY17) for the industry and more so for Indigo due to its lowest cost and fuel efficient aircrafts.”
Prima facie, Mudar Patherya has once again done his homework by identifying stocks that have reported robust quarterly results. No doubt, these stocks are powerhouses and can be expected to fill the pockets of investors with pure gold in the foreseeable future!