There are several practical examples which show that when you buy stocks which are in the throes of difficulty, you stand to make a pretty packet when the tide turns. We saw this play out in Muthoot and Mannapuram and also in Ranbaxy & Wockhardt. Investors who bought at the peak of the crises have taken home a huge reward for their efforts.
A recent example that is still playing out this theme is MRPL.
Anish Jhaveri, CEO, Antique Stock Broking, was the first one to put a buy on MRPL in June 2011. He predicted that the huge refinery expansion would catapult MRPL to the big league. However, he got his timing hopelessly wrong. The expansion ran into huge delays and MRPL raked up gigantic losses, sending its stock price spiraling downwards.
Then, when everything was looking dismal, Nirmal Bang came on the scene in May 2013 and urged a buy on the rationale that while the headwinds were priced in, the tailwinds were being ignored.
But, it is Amar Ambani of IIFL who got the timing perfectly right. In the December 2013 report, when MRPL was languishing at Rs. 41, IIFL urged a strong buy and promised a target price of Rs. 51. The cue for the buy call was that MRPL’s long-delayed expansion was nearing completion. That promise came true yesterday, when MRPL effortlessly crossed Rs. 51, yielding a fabulous return of 22% (pdf) for just a few weeks work.
Now, everybody has jumped into the fray.
Centrum has issued an ‘initiating coverage report’ (pdf) calling MRPL a ‘compelling investment bet’. Centrum has suggested a buy with a price target of Rs. 60 on the basis that MRPL is “A credible turnaround candidate due to (1) Channel checks revealing stabilization of power plant and hence imminent commissioning of phase-III in 1-2 months; (2) Strong business outlook despite building in conservative Gross Refining Margin (GRM) leading to a modest positive turnaround in earnings from FY15E; and (3) Negligible impact of Export Parity Pricing (EPP), if implemented. The stock adequately factors in the continuing delay in capacity expansion and consequent low GRM.”
ICICIDirect has also issued an ‘initiating coverage report’ (pdf) and recommended a BUY with a price target of Rs. 61 on similar logic. It has called MRPL “An investment opportunity; ready to unfold”.
The logic is very attractive and convincing. Once the refinery does go on stream and starts churning out the finished products, you can be sure that the hordes will throng the counter and send the price spiraling up. You need to position yourself in the counter before that happens.