Westbridge Buys La Opala RG, Microsec’s 8-Bagger Stock

Credit for discovering La Opala RG as the stock to buy has to go to Microsec Research. In a report issued in September 2012, Microsec identified 9 top-quality mid-cap stocks to invest in. One of the stocks was La Opala RG which was then languishing at Rs. 127. Today, less than 2 years later, La Opala RG is at Rs. 1165, meaning a gain of an incredible 847%.

Now, the best part is that La Opala RG is not an isolated success story for Microsec. Many of the other 8 stocks that they chose are also incredible performers such as Somany Ceramics (458% gain), Dhanuka Agritech (358% gain), PI Industries (272% gain), Cera Sanitaryware (268% gain) etc.

Here is what the performance of the 9 selected stocks looks like:

*adjusted for split

Now, the significant news is that Westbridge Capital, which is also known as Jwalamukhi Holdings, has decided to subscribe to 5,02,468 equity shares of La Opala RG at a price of Rs. 1,100 each. The shares will be subscribed by WestBridge Crossover Fund, LLC. The total investment is about Rs. 55 crore and the funds will be used for expansion etc.

The first thing you must note is that Westbridge Capital a.k.a. Jwalamukhi Holdings is amongst the savviest investors today. It was co-founded in 2011 by four whiz-kids, Sumir Chadha, K.P. Balaraj, S.K. Jain and Sandeep Singhal, who were earlier co-founders of Sequoia Capital (India). The four were bitten by the same bug that bit Ashish Dhawan of ChrysCapital and Pulak Chandra of Nalanda Capital – the urge to invest in public stocks rather than to dabble with private equity. Westbridge Capital was set up in the beginning of 2011 with an initial corpus of $ 500 Million. It raised a further $325 Million in February 2014 for a fund called the “WestBridge Crossover Fund”. The total corpus as of date stands at $825 Million (~ INR 5100 crore).

Westbridge Capital’s current portfolio boasts of several top-quality multi-bagger stocks like Ashiana Housing, Astral Poly, Bajaj Electricals, Cera Sanitaryware, Dewan Housing, Greenply Industries, Havells India, Mannapuram Finance, Kajaria Ceramics, Karur Vysya Bank, Prestige Estate Developers, Shobha Developers, Supreme Industries etc. Among their recent purchases are Mayur Uniquoter, DFM Foods, Cholamandalam Investment and Finance Co etc.

You can tell from the names that Westbridge invests only in top-quality stocks, where there are chances of hefty gains.

Now, let’s try to understand why Westbridge got interested in La Opala RG.

La Opala RG is a small cap company with a market capitalization of Rs. 1200 crore. It manufactures high-end glass and crockery sets. It has a ROCE of about 40% and a debt:equity ratio of 0.31.

When you see that La Opala’s P/E is a whopping 41 times the TTM EPS, you will be daunted. However, that would be an incorrect way of evaluating the stock.

Rahul Arora of Nirmal Bang conducted a brilliant analysis of La Opala in January 2014 (when the stock was at Rs. 600). He pointed out that La Opala is a “very interesting story” and a “company that throws up cash”. He explained that while the market cap is just about USD 100 million, the addressable market is Rs 7,000-8,000 crore. Of this, only Rs 1,000 crore is being addressed, of which 50 percent is organised. The scale for expanding across India is “tremendous” Rahul said with awe in his voice. Rahul also correctly anticipated that there would soon be institutional interest in the stock.

To me, Rahul Arora’s analysis makes a lot of sense.

First, we must note that there is no doubting La Opala RG’s execution capability. Proof of this is in the fact that over the past three years, it has been consistently showing high ROEs and ROCe’s. The sales, EBITDA and EPS are on a steady upward climb.

Second, La Opala has a network of 125 Distributors and 10000 dealers across the country. This number is increasing at the rate of 15 per cent annually. How difficult will be it for La Opala to tap into its existing distribution network and push through other crockery and kitchen appliances, etc, on which high margin can be charged.

Third, there is a growing mass of middle class who would want to buy elite and aspirational items like high-end luxury crockery. There is also a large export market available for such goods.

So, as Rahul Arora rightly says, the scale for La Opala to expand is “tremendous”. This is why Westbridge Capital has bought into the stock. There is no reason for us to feel inhibited.