Some fair points raised by fellow boarders on both sides especially on the corporate governance aspect. It may help to think of the probability for a bull/base case scenario from corporate governance point of view. I’m not going to talk about a bear case scenario as the market is not pricing in any bearish view from corporate governance standpoint. Price action of 3x in 6 months is purely re-rating of management/business as profits or cash flows are not going to become 3x. Also the bear case for bad management / corporate governance will not really be 10, 20% downside - it will lead to severe wealth destruction if not complete capital loss so nothing much to cover in the bear case.
Bull Case - Low Probability
The bull case scenario is quite obvious and low probability in my view i.e. the management team’s character/personality has undergone a complete makeover and they start making all capital allocation decisions by safeguarding and rewarding minority shareholders going forward. And market continues the re-rating of the company with valuations somewhat trailing the superior quality franchises such as Relaxo, Bata, Metro brands, etc. If this situation does play out, this is going to be a mega multibagger.
Base Case - High Probability
Management has noticed the market frenzy for IPOs / demerger listing stories and wants to take advantage of the same. Management wants to present this new facade of a “clean, well run business” with highest standards of corporate governance and announced this demerger of the branded business to reap the same fruits as it’s peers mentioned earlier. However, this is mainly till the demerger process goes through and Red Tape gets listed at the appropriate valuations. So during this time, management wants to ensure it is making all the right moves, acting in the interests of minority shareholders and leading everyone down the garden path. However, sometime after Red Tape listing the management comes back to it’s original colors and poor corporate governance track record which subsequently ends the market participants’ current infatuation. By the time this happens, I expect significant upside from present market cap. However, I’m not sure if CMP provides enough MOS as majority have entered the party earlier.
Why I also believe at least the base case should play out - one of the promoters has been buying from the market as recently as a few days back. The same promoter bought at levels of 58 and last bought more than 1.25 cr worth shares at 128. I can’t think of many ways a promoter will buy crores worth of shares without being bullish on the near term outlook at least.
Disc: Biased as I’ve invested with transactions in the last 30 days revealed on my portfolio thread