Porinju Veliyath’s Latest Stock Pick Is A Top-Quality Micro-Cap

First, we have to compliment the sleuths of ETNow for their alertness.

Yesterday, when the news flashed that a company called ‘Honey Bricks Management Pvt. Ltd’ had bought 69,366 shares of a company called ‘Nirvikara Paper Mills Ltd’ nobody paid any attention.

Neither the name of the investor nor the name of the investee rang any bells.

However, Ajaya Sharma of ETNow is sharp as a tack. He remembered instantly that Honey Bricks Property is the investment arm of Porinju Veliyath.

A Bird on the Street Says: Honey Bricks Property is a also a personal co of a Kochi based PMS Fund Mgr, who has crazy following>(Nirvikara)

— Ajaya Sharma (@Ajaya_buddy) August 30, 2016

His colleague, Darshan Mehta, is equally sharp. He dug into official records and confirmed that Honey Bricks is indeed Porinju Veliyath in disguise.

As per the website given below, Honey Bricks is owned by @porinju https://t.co/Y6LHt9wzUz

— Darshan Mehta (@darshanetnow) August 30, 2016

Today, Porinju decided to show up personally. He marched to Dalal Street and bought a chunk of 1,50,000 shares of Nirvikara Paper Mills in his own name.

However, the flash by ETNow had alerted all of Porinju’s fans. They landed up in all large numbers at the Nirvikara Paper Mills’ counter, sending its stock price surging 20%.

The result is that while Honey Bricks could get away with paying only Rs. 49.59 per share of Nirvikara Paper Mills, Porinju was compelled to pay a much higher price of Rs. 56.99 per share.

The total investment by Porinju and Honey Bricks in Nirvikara Paper Mills is Rs. 1.20 crore.

Now, the seminal question as to why Porinju developed sudden interest in Nirvikara Paper Mills was succinctly answered by Darshan Mehta. He explained that Nirvikara Paper Mills was earlier a part of Balkrishna Industries and that it has been now been demerged.

Nirvikara was earlier part of Balkrishna Inds. Post demerger of paper unit, was renamed Nirvikara. Now will be named Balkrishna Paper soon.

— Darshan Mehta (@darshanetnow) August 30, 2016

He also revealed that there is a “big change” happening in Nirvikara in the form of capacity expansion.

Had spoken to Nirvikara management earlier. The big change that is there is that new capacity comes on stream. Capex already done.

— Darshan Mehta (@darshanetnow) August 30, 2016

[*C] Consolidated     [*S] Standalone

(Source: Business Standard)

Ambitious expansion commissioned

A little bit of digging shows that Nirvikara Paper Mills has undertaken an ambitious expansion and upgradation programme pursuant to which it has successfully installed a modern technology machine. The new unit has an annual capacity of 63,000 tonnes and will manufacture duplex boards. The unit has received approval of the Maharashtra Pollution Control Board on June 2 and has commenced commercial production.

Blue-Chip management caliber

The association of Balkrishna Industries with Nirvikara Paper Mills is very significant because the promoters of Balkrishna (the Poddar group) are known for their ethical standards of corporate governance. Balkrishna Industries is also renowned as a wealth creator stock and has attracted eminent savvy investors to its fold.

Replay of Arvind Infrastructure strategy

Prima facie, Porinju appears to have planned the Nirvikara Paper Mills gambit in the same way that he strategized the investment in Arvind Infrastructure.

It may be recalled that when Arvind Ltd spun off its real estate division into another company (Arvind Infrastructure), a lot of big investors dumped the stock of the realty company because, firstly, they were not interested in a realty stock and secondly, because the investment was too petty for them.

This caused the price of Arvind Infrastructure to slump to an extent that it was quoting at throwaway valuations.

Porinju moved in to scoop up the stock at the right time and was able to pocket mega bucks from it.

One can see the same play out in Nirvikara Paper Mills.

Big ticket investors like Akash Pakash’s Amansa Holdings, who received shares in Nirvikara pursuant to the demerger, have been busy dumping the stock over the past few months, putting the stock price under immense selling pressure.

Fortunes for the paper sector have changed as demand exceeds supply and raw material prices have slumped

It is worth noting that the fortunes of paper mills are on the ascent thanks to a sharp dip in the prices of raw materials. An expert from Care Ratings was quoted as saying:

“The worst is over for the rated players in the writing and printing paper segment with softening of wood prices and will largely maintain stable credit risk over the near to medium term. This will largely be due to cost pressure subsidizing and expected improvement in domestic demand and export opportunities. Packaging and paperboard segment will benefit from higher growth”.

The expert also opined that the paper industry would grow at 7% CAGR over the next five years.

Other experts pointed out that the demand for paper has been mirroring the growth in India’s gross domestic product and has been more than the supply. It was emphasized that from FY12-15 domestic demand registered a CAGR of 8 per cent as compared to a 6 per cent increase in production. The operating capacity of the industry currently stands at around 13 MT. During 2015-16, the domestic production is estimated to be 12.2 MT.

Paper stocks are at 52-week highs due to robust results

Almost all paper companies such as Seshasayee Paper and Boards, West Coast Paper, Star Paper Mills, Ruchira Papers, N R Agarwal Industries, Tamil Nadu Newsprint & Papers, Kuantum Papers and Kushal Tradelink are soaring close to their 52-week highs. This is because all of them have reported robust Q1FY17 results.

Conclusion

It does appear that Porinju Veliyath has once again timed his investment in Nirvikara Paper Mills perfectly. The stock is at the ideal “inflection point” owing to its expansion plans. The tailwinds for the sector coupled with the dynamism and business foresight of the Balkrishna Industries’ management augers well for the micro-cap stock!