Hope you are doing well.
Yesterday we released our new stock recommendation for our Premium members and would like to share with you details on the same.
As the subject line suggests, the stock we have recommended is one of the leading companies in its industry and is aiming to double its sales between FY 21 and FY 24 while expanding the EBITDA margins by 300 basis points (bps).
Over the past 9-10 years the company has grown its sales in double digits while the profits have compounded at ~30%.
Off-late the management has become quite aggressive and bringing about the following changes in the company:
- The brand architecture has been reorganized
- Expanding the product range and moving up the value chain from mass market products to premium products – will help in margins expansion
- Transforming the distribution network – you will read about it in detail in our report and we believe this can be the game changer for the company in the next 3-4 years
- Digitizing and automating various steps of the supply chain - covered in detail in the report
Overall, even if the target of doubling the sales by FY 24 is a bit ambitious, we believe the company should be able to sustain 13-15% CAGR in sales, expand the margins by around 200 basis points and reduce the debt further on the back of improvement in working capital cycle and cash flows.
Moreover, considering it’s one of the leading companies in a relatively fast-growing sector with a strong operational track record, the valuations are very reasonable at around 16.5 times pre-tax earnings.
We believe, if the company is able to execute 13-15% CAGR in sales with expansion in margins, the stock might get rerated to 25-30 times earnings.
Thus, considering low downside with a potential for 20-25% + CAGR over the next few years, we have added the stock to our model portfolios and smallcases.