A clear indication that a stock is likely to turn out to be a powerhouse winner comes when the stock wizards start scaling up their holdings in the company.
This trend is clearly visible in GHCL, the small-cap (market capitalisation of Rs. 1,778 crore) manufacturer of soda ash (chemical) and textiles.
IndiaNivesh Securities, which held 14,00,238 shares of GHCL as of 31st March 2015 has increased its holding to 25,20,058 shares as of 31st March 2016.
Not content with this, IndiaNivesh has bought another chunk of 12,25,000 shares in the name of IndiaNivesh Capitals Ltd.
EOS Multi Strategy Fund Ltd, which held 27,87,484 of GHCL as of 31st March 2015 has increased its holding to 28,52,484 shares as of 31st March 2016.
In addition to the existing investors scaling up their holdings, three heavy duty investors have made their presence felt in FY 2015-16.
(i) Morgan Stanley Asia (Singapore) bought 10,45,000 shares.
(ii) Ocean Dial Gateway To India Mauritius Ltd (which is advised by Sanjoy Bhattacharyya) bought 25,00,000 shares.
(iii) Ashish Kacholia, one of our favourite stock wizards, bought 14,80,100 shares.
Now, it is obvious that such super-savvy investors would not have made a beeline for GHCL if they are not convinced that mega gains can be harvested from the stock.
In an earlier piece, I have laboured hard to explain the virtues of GHCL by drawing heavily from a research report issued by NVS Wealth Managers as well from the investors’ presentation furnished by the Company.
Thankfully, GHCL has lived up to the expectations of the savvy investors by delivering fabulous returns of 230% over 24 months and 131% over 12 months. The three month return is itself a hefty 60%.
Now, the astonishing part is that despite these mind-boggling returns, Emkay has expressed the expert opinion in its Initiating Coverage report that GHCL is still quoting at “neglected valuations” which does not take into account its “strong business fundamentals”.
Emkay has made three core points to support its proposition:
(i) The soda ash business enjoys huge margins and contributes huge cash flows:
GHCL is one of the key soda ash players with market share of about 23%. Company enjoys margins in the range of 28-31%, which is 400-800bps higher than its peers driven by its cost leadership and backward integration. The segment contributes approximately Rs 4-4.5bn pa to cash flows and ongoing capex to boost it further to Rs5bn with RoCE of 36%
(ii) The margins in the textile business can expand significantly:
GHCL’s thrust on improving its product mix, changing customer profile and driving its capacity utilization is expected to improve its margins from 11% in FY16 to 13%/15% in FY17E/FY18E respectively.
(iii) The valuations are cheap at 4.4x FY18 EPS:
Valuations look attractive as at the CMP of Rs 171, the stock is trading at 4.4x FY18 EPS.
Emkay’s reasoning is quite convincing. It has valued GHCL at 6xFY18 and computed the fair value of the stock at Rs 228.
The target price of Rs. 228 offers an upside potential of 33% from the CMP of Rs. 171. This is quite a hefty upside by any standards and should bring a gentle smile to the lips of the savvy investors who are invested in the stock!