Hope you are doing good and having a good festive season.
Just a few days back we shared our new stock recommendation with our members and would like to share with you details on the same.
Besides investing in growth companies at reasonable valuations, we also look for good companies in cyclical businesses at their lows so that once the cycle turns around, we can make 2-4x or sometimes even more on such investments.
Such high returns do materialize in the deeply cyclical companies as during downturns the stocks get beaten badly to extremely low valuations and when the cycle turns around, the investor gets the benefit of both earnings and valuations expansion; however, it is also important to not get trapped at the high-end of the business cycle.
So, the stock that we shared yesterday operates in a paper business.
If you are interested in investing in such stocks, you may find our latest stock report and the thesis behind the same interesting.
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The paper industry has been going through a bit of a downturn because of 8-10% drop in realizations in FY 20 and now drop in volumes in H1 FY 21 on account of covid-19 related lockdown.
As a result, some of the good companies from the Paper space are available at less than 0.4-0.3 times their highs recorded in 2018. In terms of valuations, they are available at less than 0.5 times book value and only 4-5 times last 7 years avg. PAT or Cash flows from operations.
The stock we have recommended is available at such valuations despite very low debt, continuous expansion and other operational improvements.
We believe as the vaccine becomes available and the educational establishments and commercial offices start opening up, the performance and the valuations of the company will improve significantly.
More details on the attributes of the company are as follows:
- Market Cap < 500 crore
- FY 10-FY 19 – 10% CAGR in sales; 16% CAGR in operating profits
- Avg. Return on Equity – 17% for the last 5 years
- Debt – Consistently reducing since FY 10 with debt equity ration of less than 0.3
- Valuations – Available at 4-5 times 7 years avg. PAT and Cash flows from operations. Less than 0.5 times book value
- Promoter stake – Higher than 50% with regular addition through open market purchases since FY 12
- Growth Plans – Modernizing its existing units with a proposed CAPEX of 70 crore spread over FY 20-FY 21. The objective is to produce higher quality papers, improve realizations and generate better output
As mentioned above, despite the characteristics of a good company, the stock is available at 4-5 times earnings and cash flows and significantly below book value.
With such stocks, one can’t rule out a possibility of 100-200% gains or even more with the turnaround in the cycle.
Wish you good health and wealth.
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Name: Ekansh Mittal Email Id: [email protected] Ph: +91 727 5050062
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Disclaimer: www.katalystwealth.com (here in referred to as Katalyst Wealth) is the domain owned by Ekansh Mittal. Mr. Ekansh Mittal is the sole proprietor of Mittal Consulting and offers independent equity research services to investors on subscription basis. SEBI (Research Analyst) Regulations 2014, Registration No. INH100001690.
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