Porinju Veliyath’s secret formula for finding multibaggers – invest in high-quality stocks which are in doldrums
After a meticulous study of the numerous stocks recommended by Porinju which have turned into magnificent multibaggers, it appears that his secret formula is quite simple.
Porinju seeks high-quality stocks with a good business model and management which for one reason or the other are languishing and not participating in the Bull run.
Thereafter, it is a simple case of holding tight and playing the waiting game. Someday or the other, the stock is bound to rediscover its mojo and surge like a rocket, showering multibagger gains upon its shareholders.
The advantage of such stocks is that even if they don’t surge, there is unlikely to be a loss of capital because the stocks are already in the doldrums and drained of all expectations.
Porinju’s last two recommendations, Everest Industries and Ramco Industries, are textbook examples of this.
Both stocks were sluggish owing to so-so quarterly results. However, a slight whiff of the housing and infra boom and the bullish talk of the Government has sent both stocks surging into the stratosphere.
While Everest Industries is up 95%, Ramco Industries is up 40% since then.
There are more examples which prove the veracity of my theory. However, I will not dilate upon them in the interests of brevity.
SY 2074 will be a turnaround year for Allcargo Logistics
Ayesha Faridi, Tanvir Gill and Nikunj Dalmia jointly requested Porinju to give stock ideas to novices as a Diwali Gift.
Porinju readily agreed and recommended Allcargo Logistics on the ground that it could “turnaround” in the foreseeable future.
His precise advice is as follows:
“Another stock I have in my mind is Allcargo. Nobody has been talking about Allcargo Global Logistics for a long while. We have been buying stock in PMS for some time. The stock prices is around Rs 165. There is no hurry to buy. It is a very heavy stock. Investors should not just jump into buy this stock at this point of time. It has around Rs 4000-crore market cap. It is a very large logistics company. Multimodel logistics player. I think they are largest LCL consolidators in the whole world. This company is worth watching. Again, it cannot be a multibagger. But 2074 should be a turnaround year for Allcargo.”
— ET NOW (@ETNOWlive) October 19, 2017
Allcargo Logistics, the next TCI + TCI Express?
Old timers will recollect that Porinju had recommended Transport Corp of India when it was languishing at Rs. 245 on account of flat and unimpressive quarterly results.
TCI @ 245, flat Q3, corrected well. Worth exploring for medium-long term investment (not for traders) Need not hurry to buy. We hold n PMS
— Porinju Veliyath (@porinju) February 2, 2016
That was the opportune time to aggressively buy the stock because it was in the process of implementing a demerger into TCI Express. The stock surged thereafter to the point of no return.
— Porinju Veliyath (@porinju) June 1, 2017
Presently, TCI is quoting at Rs. 278 while TCI Express is quoting at Rs. 563, aggregating Rs. 841.
For every two shares of TCI, one share of TCI Express was allotted. This means that investors who bought TCI on Porinju’s recommendation are basking in hefty gains of 128%.
Contract logistics & land monetization will add value to Allcargo: Motilal Oswal
It is our good fortune that we don’t have to rely solely on Porinju’s advice but also have the benefit of expert opinion to help us come to a decision.
Abhishek Ghosh and Pradnya Ganar of Motilal Oswal have conducted a detailed study of the innards of Allcargo Global and recommended a buy on the following logic:
“Contract logistics, land monetization to add value
Management initiatives to improve return ratios
– We expect AGLL to create value in the medium term from strong growth in contract logistics through its subsidiary, ACCI. Monetization of land parcels by roping in strategic partners would add further value to the company.
– The MTO segment should continue to see growth in profits, led by strong revenue growth due to rising proportion of FCL shipments coupled with stable margins. Also, the management has taken multiple initiatives, which should result in an improvement of the company’s overall return ratios.
– AGLL trades at 11x FY20E EPS, which is attractive, given improving return ratio profile and 16% earnings CAGR over FY17-20E. We value AGLL on 14x FY20E EPS and arrive at a target price of INR213, implying 25% upside. We believe an additional value of 25-30% of present market capitalization could get created in the medium term from contract logistics, land monetization and entry into last mile delivery, which we are not factoring into our present target price. Maintain Buy.
Contract logistics the way forward for domestic business
We expect a paradigm shift in contract logistics in India. With rising dependence on third-party logistics (3PL), this segment should witness robust growth. Organized large-sized players are scarce in this space and AGLL has a three-pronged strategy to cement its early mover advantage:
1. Organic growth: AGLL has created a niche for itself in contract logistics, with strong exposure to Autos, Chemicals, E-commerce, fashion and Retail. This also helps improve AGLL’s overall profitability profile, as margins in these segments are higher. Additionally implementation of GST is expected to give a big demand boost to contract logistics business in the country.
2. Acquisitions in last mile delivery: AGLL foresees good prospects in express delivery for e-commerce players – Amazon and other key clients are likely to increase business to 3PL players. AGLL intends to invest upto INR2b towards acquisition, which will give them access to last mile connectivity particularly for B2C segment as they have exposure in B2B segment.
3. Monetization of land parcels in key strategic locations: AGLL intends to develop 500 acres of land bank in multiple locations like Hyderabad, Bangalore, Chennai, Jhajjar and Nagpur into warehouse complexes, Logistics parks along with strategic partners. It intends to follow an asset-light model in this activity with major capex could be incurred by the strategic partner expected to come on board.
MTO segment profitability continues to improve
AGLL’s multi-modal transport operator (MTO) business generates annual free cash flow of over INR2b, led by low capex requirement and steady growth. The segment has witnessed significant improvement in profitability over the last 2-3 quarters, led by revival in container shipping freight rates globally. Rates have firmed up due to consolidation of container shipping companies and demand recovery after prolonged weakness. This bodes well for the segment’s prospects in the medium term; profitability should improve over the next 12-18 months.”
Religare, PL and Maybank Kim also give the green signal to buy Allcargo
The Investment Rationale canvassed by Religare and PL in support of a buy recommendation is more or less similar to that advanced by Motilal Oswal.
Maybank Kim’s recommendation is in the following terms:
Target: Rs 220
Our target price for Allcargo Logistics is based on SOTP (sum-of-the-parts) valuation. We believe premium is warranted as after two years of flat EPS, AGLL is expected to report net profit growth of 10 per cent/ 14 per cent in FY18/19.
Net profit growth is led by organic and inorganic growth in CFS, and restructuring in P&E business. We would like to highlight that Blackstone’s complete exit from the company removes a major overhang on the stock.
AGLL currently trades at 40 per cent discount to its peers in LCL business and 35 per cent discount to its peers in CFS business.”
DD Sharma recommended Allcargo as a “value pick”
DD Sharma, the veteran stock picker, was one of the first to identify the potential of Allcargo. He called it a “behatareen” (excellent) logistics company which is “attractively priced”. He also described it as an “Indian multinational company” owing to its global operations.
Of course, DD Sharma’s target price of Rs. 600 (pre bonus) has still not come true and the stock is still languishing at the level where it was when DD Sharma made the recommendation. However, the merits of his analysis of the fundamentals cannot be disputed.
Sandeep Jain also recommends Allcargo on the basis that it is attractively valued
Sandeep Jain of Trade Swift Broking, a noted stock market expert, also recommended Allcargo on the basis that the risk-reward ratio is favourable.
He opined that the Company has good fundamentals and offers a safe opportunity for investors to pocket a few bucks.
Will the Mahindra Logistics IPO provide the much needed catalyst for Allcargo?
The MMB punters have opined out that the exorbitant valuations being demanded by Mahindra Logistics of 66.9x FY17 EPS for the IPO will put the focus on the cheap valuations at which Allcargo is quoting (17.71x) and spur demand for the stock.
Prima facie, there is merit in the theory of the MMB punters.
We know from past experience that defying Porinju’s recommendations is not conducive to our financial well being. On the other hand, we have prospered whenever we have obediently followed instructions and tucked into the stock. However, whether Allcargo Global will also live up to those lofty expectations has to be seen!