Would like to caution investors on buying IndoCount at current levels. As a cyclical stock, you should not look at earnings in the rear view mirror but rather looking forward. Although it looks cheap compared to a cyclical high, this stock is trading at 2.7x book for a business that has frequently seen negative OPMs in the past, and thus is only a buy if you expect current margins to improve.
To track the cycle of the textlie cycle, we can look at GHCL’s earnings, which just came out. GHCL is very similar to ICIL in terms of its product mix (spinning and home textiles).
If you look at ICIL margins over the same time period (excluding Q2 results as they are yet to be seen), you will see that the drop in margins for both companies usually moves hand in hand. A look at GHCL Q2 concall confirms the hypothesis of 1) high oversupply in India 2) competition from China and 3) increased pressure from vendors due to their poor health.
Although there were some GHCL specific factors, most of it can be attributed to general industry conditions, and GHCL management does not see a revival for a couple of years, as is observed in most cycles. Thus there is a strong downside potential for this business to ~1-1.5x P/BV or even lower depending on how margins play out.
Disc. Short position on ICIL using futures/puts. May change anytime without updating post.