Buying the pessimism: Trying to catch the bottom

Stock Opportunities
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IRM Energy

Cause of pessimism

  • Chairman and CEO quit recently; Chairman Maheshwar Sahu had built a very strong foundation and took the company to IPO. His departure, followed by departure of the CEO shortly after, wasn’t taken kindly by the market.

  • Criminal charges were levelled against Mr Rajeev Modi in early 2024

  • Fatehgarh Sahib is one of their key GAs (Geographical Area). NGT directed the industries in Fatehgarh Sahib to switch to natural gas from coal, but industry has sought a reprieve due to which the consumption of natural gas hasn’t gained traction in this GA.

  • In Nov/Dec (2024), Govt reduced the quota of low cost gas to CGDs which made all CGD stocks tumble mercilessly.

Thesis

  • Only listed private player in CGD business other than Adani Total

  • CGD operators work like a monopoly business in the Geographical Area allocated to them

  • Natural gas contribution in India’s energy pie only going to increase (per Govt policy)

  • TCO (Total Cost of Ownership) of CNG vehicles is 20 30% lower than EVs (batteries have to be significantly cheaper for middle class to prefer EVs over CNG cars en masse). CNG vehicles market share on the rise proves this point.

  • Backed by a promoters with a strong pedigree
    Of the four GAs they have been allocated two of them have substantial industrial presence (Fatehgarh Sahib and Namakkal)

  • Namakkal in terms of demand is > the other three GAs…and they have just about started in Namakkal

  • EPS is projected to double by/in FY26…so at the current valuation it looks like Growth At Reasonable Valuation. Current output is 0.5 mmscmd and management is confident about reaching 1 mmscmd by FY26

  • Given the monopoly nature of business the only thing that can come between current and projected revenue is capex execution (and the execution is progressing really well – look at the investor presentation)

  • They have three subsidiaries that look like good business in themselves…and can have a life outside of the CGD business (one is making gas from agri and animal waste, another is making pipes for gas distribution, another is making cascade cylinders). A demerger at some point can’t be ruled out.

  • Namakkal was the most hotly contested GA in the 11th round of bidding by PNGRB. They managed to edge out Adani Total and some other heavy weights

  • Their topline growth over the last 5 years shows that they are really good at project execution
    To me this is a company that can double in mcap in the next 3 years

Antithesis

  • Rajeev Modi has some criminal cases against him). Though he is not involved in an executive capacity but is the promoter none the less

  • If EVs TCO becomes very affordable then it can make a serious dent in the topline

  • Project execution doesn’t go as per plan
    Govt has allocated all GAs in the country (except islands) so I am not sure where the next leg of growth will come from after 4 5 years

  • Supply side issues – they buy gas from GAIL and RIL

  • Geopolitical scenario disrupting supply

  • Any drastic change in govt policy (which did happen recently)

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67

Now that you’ve put Barbeque Nation. Keen to add Restaurant Brands Asia to the list.

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68

Buying pessimism is there a method which people here use?? I have started doing research on 52week lows and All Time Lows and look at when the price behaviour changes… mostly it gets confirmed when 20ma crosses 50ma and even more when 20ma crosses 200ma from below. Would love to understand what is the optimum time for all of you to buy pessimism.

Current pessimism opportunities I am interested in

  1. Arman Finance
  2. Equitas
  3. Aarti Industries
  4. Swsolar
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69

Also could add RACL to the list as well.
Management has proven their ability.
Currently going through downside of the cycle.

Disc: Slowly accumulating, as from management commentary it seems pain will continue for one to two quarters more.

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What’s your thesis on barbeque nation would love to hear

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Well if you are including Equitas then you should definitely incl. Muthoot Microfinance

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If Microfinance industry cycle changes everything will do well

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73

Hello @Mahigiri21, honestly I tried to see, however I could not understand the business, I read their annual reports and concall (last which was done in feb 24), from numbers I feel the worst is behind as inventories, receivables, debt is reducing, margins hit all time low. Investors were really depressed in the concall, also on twitter. Dyes and pigment companies are showing some strength, however I think we need to go more deep. I find the business of API, chemicals a little tough to understand. They have promoter pedigree of Aarti. Looking at the stock price it seems people are ready to sell at any price. Lets study more.

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From last many years, I think the hate I have seen for microfinance sector is commendable. People are saying we are staying at arms length from such companies. Definitely people are deeply pessimistic about this industry for reasons which are well known. I am personally invested in Muthoot Capital Services since post covid. They have been able to clean the cockroaches well and in last quarter when most of the NBFC and banks came out with increased NPA’s they actually improved their asset quality. They have started their car lending business too. From numbers it seems they have been very cautious in giving out loans unlike others of the likes of Poonawala fincorp and few others in whom we saw stupendous growth post covid however increase in NPA’s too in last few quarters. They have stayed very conservative. I asked few questions from management too in the concall, and was satisfied with their response. If anyone has any other thesis about them please let me know.

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@Mahigiri21

Causes of pessimism:

  • Contraction in SSSG recently
  • Not profitable (yet)
  • Perhaps not expanding at the same pace as investors thought it would
  • Inflationatory pressures directly impacting discretionary consumption

In my view all the above are transitionary.

Reasons to be optimistic:

  • A seasoned management that is taking all the right steps: expanding and starting new lines of restaurants (premium CDR - Salt and Toscano)
  • The operating leverage will start playing out in a couple of years
  • QSR-type efficiency in the garb of CDR/premium CDR
  • A pan India brand avilable at 1600Cr mcap!
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Management also alludes to this. However, all expenses in the PnL seem variable. A price increase to cover inflation seems a tough option. I wonder how operating leverage applies to this business.

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@Surender perhaps not a 24 carat operating leverage but more like a 18 carat. Once they are through with the capex and have have set up 300+ restaurants in the next 3 years, and as these new restaurants mature the leverage will play out. Of course it will plateau out at some point. What’s your take?

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Thanks for sharing your thesis. I agree that it is available for very cheep. The BN’s total OCF in 3 yrs is similar to Apar industry!!

I would like to mention what I don’t like about the stock.

The management does not appear to be minority shareholder friendly which is the same management in Sayaji hotels. Therefore market values it at a discount to peers. Recently, they converted the entire debt provided to GCC subsidiary to equity. Market didn’t seem to like it, and the stock has crashed from 685 to 410.

Second, I believe that interest rates are going to remain elevated for considerably longer, impacting the demand. It’s not clear if the worst is behind us, entire qsr sector is in downturn and it seems that turnaround in cycle is still some time away in future.

Would love to hear your perspective on this.

Disclosure: Invested around 500 levels, but reconsidering my decision due to above two reasons.

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