First, we must come to terms with Neha Majithia’s credentials. In September 2012, Neha issued a report recommending 9 small and mid-cap stocks for investment. It included a few stocks like La Opala which were unknown to the masses at that time.
I last checked the status of her stock picks in January 2014 and was astonished to find that they were giving a return of 118%.
Let’s do a quick status check of the stocks at the present valuations:
|Stock Picks||Stock price on 09.09.2012||CMP on 23.05.2014||Gain/ Loss (%)|
|Amara Raja Batteries||193*||397||105|
|Tide Water Oil||7872||9836||25|
|Simple Average Return||228|
A return of 228% in just 18 months is simply mind-blowing. There is one six-bagger, one four-bagger, two two-baggers and three one-baggers in the portfolio. What this also means is that if I had just cloned her portfolio in January 2014, my portfolio would have doubled in just a couple of months.
So, there is no question that Neha Majithia is an ace stock-picker and we need to treat her stock recommendations with due respect.
Now, let’s pay attention to Neha’s latest stock pick Whirlpool. Neha first homed in on Whirlpool on 28th November 2013 when the stock was languishing at Rs. 171. At the CMP of Rs. 304, investors are already looking at a fabulous gain of 74%.
In her latest report, Neha has reiterated a “strong buy” of Whirlpool. Her logic is simple and compelling:
“We continue to recommend Whirlpool of India Ltd a “STRONG BUY”. Whirlpool of India is the subsidiary of world’s largest consumer durables company Whirlpool Corporation, USA. The parent company is
headquartered at Michigan, USA having global presence over 170 countries and manufacturing operation in 13 countries with 11 major brand names such as Whirlpool, KitchenAid, Roper, Estate, Bauknecht, Laden and Ignis. Diversification of products in a single segment, launching of new models and rupee appreciation/ stable commodity prices to increase margins and ease pricing pressure, new stable government to lead to well balanced economy and ensure level playing field.
Debt Free Company; Increasing free Cash flows and scope for dividend payment in future: We believe Whirlpool India can leverage on its debt‐free status to improve net profit margins in the coming years also. The company generates healthy cash flows. Its cash balance has gone up from INR155cr in FY13 to Rs 292cr in FY14. Hence, healthy cash flows leave much scope for the company to consider dividend payments going ahead”.
While Neha’s analysis cannot be faulted, there are a couple of downsides to Whirlpool that I can think of. The first is that it operates in the ultra-competitive segment of air-conditioners, washing machines, refrigerators etc where the margins are wafer-thin. Also, you have the aggressive Korean behemoths Samsung & LG and a host of domestic companies like Godrej, Videocon etc breathing down your neck for a slice of the market share.
Secondly, a large (25%) component of Whirlpool’s raw material is imported and it has gained as a result of the rupee appreciation. However, if the currency turns the other way, Whirlpool’s margins, which are already wafer-thin, will be sent tumbling.
An alternative to Whirlpool that I can think of is Bajaj Electricals. If you read Motilal Oswal’s report, you will find that while the consumer electronics division is minting money and is an “enviable consumer franchise“, the projects division is/was bleeding cash but is on the verge of a “strong turnaround“. This was confirmed by Shekhar Bajaj who has come on record to confirm that the project division is/will be also profitable now. Bajaj Electricals also recently (22nd May) announced (pdf) that it has won an order from Power Grid worth Rs. 323 crore.
In the report, Motilal Oswal have predicted that Bajaj Electricals’ earnings will “quadruple” over FY 14-16 and that a “re-rating is imminent”.
Sharekhan has, in its’ report on 20 top-quality stocks for NAMO made three salient points about Bajaj Electricals:
(i) The turnaround in the project business and continued momentum of the consumer business are likely to catapult its earnings to 8x in the next two years.
(ii) With a turn-around of the project business where almost 50% of the total capital is deployed could improve the
RoE significantly from 7% in FY2014 to 20% in FY2016.
(iii) The consumer business is generating a significant cash and return ratios, which would continue to add value for the investors. With an improvement in the market sentiment, the stock could touch Rs450 in the next two years.
If what Motilal & Sharekhan say comes true, Bajaj Electricals will be an unstoppable juggernaut. Also, it is a multi-year opportunity.
Speaking for myself, I had a chunk of Whirlpool stock which I sold (before I read Neha Majithia’s report) and invested a part of the proceeds in Bajaj Electricals. Now, I am eager to see whether Bajaj does outpace Whirlpool or not over the next six months!