Why Are Dolly Khanna, Anil Kumar Goel, Nirmal Bang & Morgan Stanley Aggressively Buying This Small-Cap Stock?

Anil Kumar Goel appears to be amongst the first to spot the potential of Srikalahasthi Pipes Limited (earlier known as Lanco Industries). In the March 2015 quarter, he was spotted holding 4,85,072 shares. By the June quarter, the holding of shares had increased 5,25,000 shares. In the September 2015 quarter, Anil Kumar Goel’s shareholding is further increased to 5,75,000 shares.

Nirmal Bang and Morgan Stanley entered the scene in the June 2015 quarter with a holding of 4,05,600 and 4,21,206 shares respectively. In the September 2015 quarter, the holding of the two stalwarts stands at 4,00,002 and 6,32,413 shares respectively. It is evident that Morgan Stanley has substantially increased its holding.

Dolly Khanna, our favourite stock wizard, has made a grand entry in the September 2015 quarter with a holding of 4,06,369 shares.

So, why are all the stock wizards so interested in Srikalahasthi Pipes?

The answer is that Srikalahasthi Pipes is a classic turnaround story. According to an article in Business Line, Srikalahasthi Pipes was making heavy losses two years ago. However, a change in management from the Lanco group to the Electrosteel group coupled with a change in product (small diameter pipes) meant that the fortunes have changed dramatically. The Company invested in expansion which brought down the unit cost. The result is that the net profit for 2014-15 increased to Rs. 83 crore from Rs. 30 crore in the previous year. BL quoted Gouri Shankar Rathi, Srikalahasthi’s Director, as stating that the story is just beginning. “The full benefit of the capacity expansion will come to the company this year”. He explained that the expansion has happened in two phases. First, the company put in Rs. 100 crore in a de-bottlenecking exercise and raised its production capacity by 50,000 tonnes to 225,000 tonnes. Alongside, it began Rs. 325 crore investment programme to increase capacity by another 100,000 tonnes. Pretty soon, the company will therefore be capable of producing 325,000 tonnes of ductile iron water pipes. Higher production implies higher hot gases coming out of the furnaces – by-products for power generation, BL said.

Interestingly, a few savvy analysts had already predicted that Srikalahasthi would be a blockbuster stock. In an interview to ET in May 2015, Madhusudan Sarda of Vallum Capital Advisors said that he is bullish on the Indian infrastructure theme in general and on Srikalahasthi in particular. “We like a company which is into making of Ductile iron (DI) pipes. It has been doing significantly well for last couple of years. It has great potential to grow in the rapid urbanisation situation that India is in. Here, I am talking about Lanco Industries, which has now been renamed to Srikalahasthi Pipes. This is an idea where we think a lot of money is to be made.” Madhusudan Sarda said.

Well, Madhusudan Sarda deserves to be complimented because Srikalahasthi is up 67% since his recommendation.

At this stage, we must note that Srikalahasthi has reported a scorching performance of 426% YOY and 1397% over two years. However, this is no reason to get dissuaded because the stock was earlier a heavy loss making entity and the stock price was accordingly beaten down.

The present P/E stands at 10.56x which is not frighteningly expensive for a small-cap with high growth prospects.

Now, to understand then future prospects of Srikalahasthi Pipes, we have to turn to the research report of SKP Securities. SKP states that Srikalahasthi is “hitting a sweet spot in water infrastructure” because the thrust of the Government on improving water infrastructure through centre & state sponsored programs, “Swachh Bharat Abhiyan”, “Toilets for All” and development of 100 smart cities, will give a fillip to demand of DI pipes.

The report also sets out the investment rationale as being (i) Leadership in South Indian market backed by strong entry barriers, (ii) Capacity addition to add volumes, (iii) Margins to scale up with better operating efficiencies & capacity utilization and (iv) Deleveraging Balance Sheet. As regards the valuation, the report opines that Srikalahasthi should be valued on the basis of EV/EBIDTA. At 5.5x of FY17E EBIDTA, the stock has a target price of Rs 346 in 18 months. This provides an upside of about 31%, the report claims.

ICICI-Direct is the other brokerage that has conducted a detailed study of Srikalahasthi Pipes. ICICI-Direct has not rated the stock though it opines that the improvement in water infrastructure will perk up demand for Srikalahasthi and the backward integration will aid in maintaining healthy margins. It is also stated that Srikalahasthi is on a strong footing and is well placed to cater to rising demand. Srikalahasthi’s topline, EBITDA and PAT are expected to grow at a CAGR of 5.3%, 8.1% and 17.9%, respectively, during FY15-17E, the report adds.

So, it does look like Dolly Khanna, Anil Kumar Goel, Nirmal Bang & Morgan Stanley have chosen their stock well and that they will take home mega gains in the future as well!