Porinju Veliyath’s Latest Stock Pick Looks Inspired By Dolly Khanna, Prof. Sanjay Bakshi, Kenneth Andrade & Anil Kumar Goel

Basant Maheshwari, in his treatise “The Thoughtful Investor”, explains that if you want to buy a stock in a cyclical sector, you must buy it either at the bottom of the down cycle or at the beginning of the up cycle. If you get your timing right, you can comfortably ride the cycle all the way to the top and make a fortune from cyclical stocks.

The textile sector is a textbook example of a cyclical sector. It is dependent on the vagaries of the economy. When the economy does well, the sector thrives. When the economy falters, the sector goes into the doldrums. This is a cycle which repeats itself every four or five years.

The textile sector has been in the doldrums for the past several years (2011 to 2014). However, there are now concrete signs that the sector has come out of a down cycle and is poised to ride to the top.

There are also tailwinds supporting the textile sectors’ up move. Cotton prices are subdued. Also, because of the difficulties being faced by the sector, the Commerce Ministry is considering interest subsidy benefits for the entire textile sector including garments.

India Ratings has stated that India is well positioned to gain from weak input prices and growing demand for apparels. It has revised the outlook for the synthetic textile sector for FY16 from ‘negative to stable’.

As expected, the ace stock pickers have already realized this fact and they are all making a beeline for stocks in the textile sector.

Prof. Sanjay Bakshi’s ValueQuest India Moat Fund and Kenneth Andrade’s IDFC MF, bought Ambika Cotton, Dolly Khanna bought Nandan Denim and RSWM, Anil Kumar Goel bought RSWM and Amarjothi Spinning Mills. Kenneth Andrade’s IDFC MF also bought RSWM.

A host of other savvy stock pickers have bought stocks in a variety of other stocks.

The fact that the textile sector is in great demand is brought out by the stock price movement.

However, the intriguing aspect is that the rally amongst textile stocks has not been uniform. While a few stocks like Indo Count and Welspun have given stupendous YOY returns of upto 400-500%, there are a few which are languishing. Amongst the languishing stocks, Gokaldas Exports stands out with a negative/ flat YOY return.

Not surprisingly, Gokaldas Exports, the underdog amongst the high-flying textile stocks, has caught Porinju’s attention. Yesterday, 22nd July, he bought 200,000 shares of Gokaldas Exports at Rs. 67.81 each, making an investment of Rs. 1.35 crore.

Prima facie, it does appear that Porinju’s game plan in buying Gokaldas Exports is to profit from the raging rally in the sector. There is nothing in Gokaldas which warrants a buy from a fundamental perspective. The company has a very poor track record of growth and has suffered huge losses.

In fact, Gokaldas Exports has been a nightmare investment for Blackstone, the private equity giant. Blackstone invested $165M in Gokaldas at Rs. 275 per share in August 2007. Thereafter, the great crash of 2008 happened and Gokaldas completely lost its way. Even the original promoters abandoned the company. In despair, Blackstone sold a part of its holding in December 2014 at Rs. 67.65 per share to ICICI, suffering a loss of 75% of its investment. Blackstone is presently in management control of the Company.

If you ponder over it, Porinju’s choice of an underdog in a raging sector makes a lot of sense. The reason the stock is an underdog is because investors have very low expectations from it. So, even if the stock flops, there is unlikely to be much damage. On the other hand, if the company begins to show some improvement in operational performance, everyone will pounce on the stock and send it spiraling up.

So, Gokaldas Exports is the classic “Heads I win, Tails I don’t lose much” sort of stock appears to be Porinju’s calculation.

So far as we are concerned, we have to take a cue from Porinju (and the other stock wizards), inspect our respective portfolios and check whether we have any textile stocks in it. If not, we should research all the well known stocks and pick the one that appeal to us.