Hi readers,
After trying almost every approach there is in last 3 years (and getting burnt in most) ranging from simple EMA in technicals to tracking reverse merger divergence with low pb and vcp breakout yada yada - I’ve realised that in hindsight most of my picks which ended up as massive winners ( after I had already sold ) were ones with almost embarrassingly simple contrarian first principles methodology.
I’ve decided to give this another try - this time with the patience of a Stonehenge. There are some sectors I noticed were facing strong headwinds, but have time and again managed to pull through. Following are my gambles :
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Polyplex & Cosmo First - I feel that the market is heavily discounting BOPET polymers given their dismal performance from margin compression, but they seem to be doing much better with some players like uflex and ester already touching ATH.
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Alkyl & Balaji Amines - Another sector suffering from its success where end users are setting up their own production facilities, and oversupply has pinned the margins down. I am betting on slow and gradual demand catching up to this with continuous volume growth already.
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Hikal - I’ll not BS anyone here. I dont understand understand pharma space but I know the key players and the legacy of margins rollercoster which makes a convincing case to flirt some stake in it.
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Venky India - Seasonal downturns led to massive devaluation for chicken centric shares and as a fellow chicken aficionado, I know every chicken has its day. Management seems quite confident of H2 and I am not chickening out of this.
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Vaibhav Global - I have my doubts on this one - its tricky. There are obvious flaws in performance where mgmt keeps guiding “operating leverage” which never pulls through. However, I feel the market has been too unforgiving on this one, and might give a knee jerk reaction if the stars align.
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HIL - Building material sector play currently at all time lowest margins. Has been increasing capacities consistently, and aims to achieve double digit margins one day from 2% as of today. There might however be some more downside like a climax move before reversal starts. I guess the same goes for life too.
I am also closely tracking Sugar and Microfinance sector for potential contra entries.
I am keeping away from Adani however since the skewness in event of failure is unacceptable.
Will keep regularly updating this space on how things worked out for these contra plays.
Looking forward to your inputs on these, or any other interesting similar spaces worth tracking.
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Thanks for this thread. It has somehow eased me that I am not the only one holding on to contra bets with no returns for the last 3-4 Qtrs. I am pretty much invested in the underperformers in the packaging and building materials space. Something worth tracking is KRBL. If their revenues start coming Q1 FY 26, they should better their 2022 numbers.
Another interesting area is the camphor sector and obviously, quality. Quality large caps should come into play.
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How did I miss KRBL! I recall monsoons had been good and these companies must have procured rice at low prices, and after 6-12 months aging it will benefit their margins. Will definitely be looking at it much closely. Thanks for this mate :))
Oriental Aromatics in champhor space seems poised to rice, ahem rise. Years back, I had thrown good money after bad money in this when I followed Rachana Ranade’s yt advice XD - seems like a good time to settle the score!
I am curious about quality large caps part - can you share some insight on this, Aniki?
Just a few thoughts to understand your rationale better: Price for most of these names is consolidating or falling for a long time and management has every reason to keep the hope alive: Operating Leverage, OPM targets etc. What business KPIs made you believe that now is the right time to take a position in these names and market is wrong in pushing the price down or making the price hover around x-axis? What if the price continues to mimic the past behavior for another 1~2 years? How long do you intend to wait?
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At the crux of it all - beneath all the fancy jargons and ruses - it’s a bet on reversion to mean. The idea was to filter shares which are at the lowest region in both P/B and Operating Margins in the last 5-10 years due to reasons linked to industry wide cycle, and not company specific inefficiency.
Then it’s just confirming this hypothesis with Technicals whether similar situations have played out in past, and how long it took to scale back to ATH. I prefer RSI on monthly basis and TD Sequential which has empirically been very convincing.
If the price continues to mimic the legacy - it should bounce back well. I intend to not touch them for 2-3 years at least since such cycles usually happen in 2 phases - one is almost a tennis ball bounce effect where price increases 30-50% from lowest in a short time, and then goes on to consolidate/fall for 20-30% for an annoyingly longgg time and then there’s the sweet breakout to ATH. The idea is to closely track changes in these phases and not lose patience.
" In growth stocks you’re rewarded for your risk appetite. In Value stocks - for your patience. "
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If this is true, the current stock of rice will be liquidated at whatever price they get as the current stock will not be able to compete with the new stock that will come in 6-12 months assuming cheap wholesale rice price is available to all, not just KRBL
There will likely be margin erosion in 6-12 months. Not a safe bet
I think microfinance will still take some time for all the pain to be absorbed - also our Pfs are v similar in terms of large allocations, similar style of (pessimism + below average p/b + triggers lined up) - Check Sheela foam as well - promoter buying here for the past few days
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Thanks for posting this. It made me scratch my head - and really look into the business.
Apparently they don’t reprice the final product, which helps them propel north of 15% margins on lower raw materials paddy cost. The next 2 quarters will be under pressure as higher cost inventory gets offloaded.
Since the market is a forward discounting machine, the problem is - WHEN does it start pricing in the certainty that 2 quarter down the line, margins are going to be excellent. It’s anyone’s guess honestly how close/far it will be to the shadow line.
Slow accumulation initially, and then at sizeable dips if any seems to be the only way out for now. I personally don’t feel there’s much downside.
I am tracking sheela foam as well. It just feels a little too early a theme to play. Yes they are the market leaders, but even if they perform to their best, consumption has to be high and Indians have to start moving to branded beds like the West.
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I’m actually very unsure about microfinance as well - Technicals are screaming a buy, but fundamentals are deaf-inately not helping the case. Since most of these microfinance players have been listed for <5 years, not sure if prices are capturing multiple cycles. The fall has been very very steep which makes me carry a bias if we are very close to the basecamp now.
Sheela Foam checks out on most parameters - mgmt guiding margins from 9% to 15% in 3 years, continuous volume growth and 3m TD Seq reversal signs. Definitely worth tracking more closely - I am unsure if there’s some more downside left due to inadequate prior period benchmarking
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Yeah… also do check zydus wellness, I think this is being clumped with the general FMCG cos, but if you observe their nos, they have been posting double digit growth for the past few Qs and I know p2p with direct FMCG won’t be fair but it trades cheaper in comparison to them - due to the past struggles of absorbing the large Heinz portfolio, rm cost inflations - future is to keep aiming for double digit growth - recently hired consultants and they are coming up with new categories - chocolates, biscuits - although again strategic changes will take quite some time to show up on pnl
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If you observe the core brands of sleepwell and kurlon volume growth has been v healthy, late 20s, the real pain was to integrate kurlon and furlenco acquisition took some debt infusion, fresh wave of a&p spends as well which keep coming once in every few years - further deteriorating the pnl - and now I think even furlenco will break even + lot of synergistic benefits b/w all the divisions
My math is not very accurate here, but this is what I feel. Let’s keep the 20% top line growth, then by FY27, they should have 4000Cr approx revenue. Even by taking their historic high OPM of 15%, PBT has to be around 500-520Cr and PAT 380-400Cr. Even if you‘re being generous and giving it 30xPAT, takes it to 12kCr, 50% from here. I just don’t see a 3~4x opportunity here tho. Yes, MCap to Sales is very mouth watering but it needn’t be the metric always
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A couple of Qtrs ago Eicher motors was a very decent buy. So quality stocks like Fischer stocks should work out, they did in the last few qtrs but they haven’t gone crazy like 2018,19 yet, but even that we need to mind the valuations. I have high conviction in private banks, especially HDFCBank and Kotak. Insurance has a long runway, but valuations are not at mouthwatering levels. LIC is the only PSU I still hold. Reliance also should start performing well at some point.
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My personal opinion given the low base and lower growth rates in the previous few years, the growth should mean revert back to 15-20% kind of growth, PAT will accelerate faster imv because of the deleveraging, op leverage and synergies. Biz throws a lot of cash, and the cash burning phase is almost done. Also I agree that price/sales and p/b is a bit distorting because of acquisitions so I use p/cf as well, almost available at 30 times average 2 year CFO… kind of a sweet spot, played a similar trade in dodla as well - also in terms of exit earning multiple I think for such a high quality leadership status co, 30 times is a bit lower, that was close to covid valuations. Usually my thesis is to buy cheap and the markets surprises us anyways… a year more delay of growth is fine - will have more time to accumulate - untill nothing fundamental has broken. Just putting out my thesis, I can be wrong. Invested and biased ofc as you can tell from my language 
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Do you know when are they expecting to stop depreciation? But yes, I agree with the end multiple being very low. I would start selling at 45PE and def out by 50PE. But the problem with this is, multiple is something that the market gives. So yeah let’s see. It’s alright, we are all biased in the stocks we invest lol
Microfinance player’s (bigger ones) have already reduced their guidance numbers. While Valuations are attractive few quarters of pain is yet to be taken. Avoiding microfinance institutions that have high concentration in Northern states i.e. Punjab UP Bihar for few quarters will help to avoid capital loss. As high NPA’s are seen here. Also we need to wait for RBI to cut the interest rates.
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Besides KRBL, I’m also looking to slowly build positions in
- Agro chemicals - Punjab Chemicals & UPL; and
- Natural gas - Indraprastha Gas
Both sectors seem heavily pinned down from pricing pressures, with P/B as low as it gets.
I’m a bit weary of how high natural gas prices can go from here though - since they usually top out near $4.5 to 5 MMBtu region. Agrochem is dicey in the sense that not all key players are exhibiting bottoming out characteristics - but seems like margins have hit the seabed
Would love to know your views/insights on this.
IGL: Is it an opportune time to buy? | Value Research
From valuresearchonline
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Using IGL as a starting point, I tried to get some idea of cyclicality in the natural gas sector of all key players. Seems to be very high correlation - but key players in very different price zones today with few below 50% ATH and some still at ATH.
I noticed that the sector normally sees 1-1.5 years of downfall, followed by 1.5 - 2 years of recovery and then some more. Share prices top out usually 6-9 months before Nat Gas prices top out, and playing these cycles can be very tricky.
P/B of all major players are near all time lower side, yet prices of some of these players are resilient. Closely tracking this space with expectations of gas price hikes coming in sooner/later.
Do share your insights on this since my understanding on this is very nascent.
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