This is the fifth post in our quarterly update series for Q1 FY20.
In this post, we’re sharing the latest updates of the stocks from our watchlist. Please don’t treat this as a buy recommendation. We find these businesses interesting and we may build position (or buy more of those that are already in our portfolio) in them in the future. The purpose of this post is to bring clarity in our understanding of the businesses we are tracking. We make our notes on the quarterly results and conference calls. Putting it up here makes it easier for us to refer them at a future date.
You can see the earlier updates here.
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Please click on the read more button for more details on each stock.
Advanced Enzymes is India’s largest enzyme company with a strong thrust on developing in-house research-based innovative products. Their current focus continues to be in the area of human and animal nutrition. They are making serious efforts towards expanding the product portfolio and market of probiotics. They are also trying to expand their presence in the fast-growing huge global market of Animal Feed. Currently, they are running at about 55% capacities, hence there is no immediate significant Capex requirement for funding their growth in the near term. Customer concentration was an issue with the company since long. Even today, the top 10 customers form about 35% of the total sales. However, it’s a marked improvement from the situation a couple of years ago. Export forms around 60% of the total turnover, thereby development in global enzyme industry have a direct bearing on the company’s performance. The pledging of shares by the promoter group was an overhang on the stock for a long time. With the recent release of all the pledge, the market should focus on the business performance going forward. Advanced Enzymes continues to be an interesting and unique business to look at.
Edelweiss Financial Services Ltd
Edelweiss Financial Services Limited is one of India’s leading diversified financial services companies. The NBFC slowdown and liquidity tightening pressure have surely taken a toll on the company’s reported earnings. Their credit cost has risen substantially this quarter. As per the management guidance and the prevailing macro environment, in the near term, worries will persist for the company. Lower ROA and leverage has impacted the ROE heavily. Nonetheless, there is one big news to cheer about for the company. An existing long term investor in Edelweiss, Kora Management, is investing a total of ~INR 875 Cr ($125 mn) of which ~INR 525 Cr ($75 mn) will be in Edelweiss Global Investment Advisors (EGIA), the advisory business. They are also close to finalizing other marquee investors for this first external investment round in EGIA, which will be limited to ~INR 1,400 Cr ($200 mn) in all. The inflow of patient capital would help the company withstand the challenging times in the near term. Due to the diversified business model they have in place in the financial service business, Edelweiss would be a company to watch out for once the economy starts moving upwards. However, in the near term, multiple challenges persist.
Galaxy Surfactants Ltd
Galaxy Surfactants is one of the most consistent specialty chemical makers in India. The company has done well to preserve sales volume growth despite the domestic slowdown and has even achieved 15% profit growth despite a fall of 7% in revenues. This was mainly due to their good product mix and good performance in key overseas markets. The company is optimistic about its prospects in the near term despite the domestic demand slowdown in the FMCG sector. It remains to be seen how long this demand slowdown shall last and how it will affect indirect players like Galaxy. Nonetheless, Galaxy Surfactants has proved itself as a good specialty chemicals stock to watch out for, particularly given its recent operational performance during this widespread slowdown in the Indian economy.
Mahindra & Mahindra
Mahindra & Mahindra are the homegrown pioneers of the Indian Auto industry. They have perfected the art of making money on small volume platforms based on their expertise and low running costs. Despite the current auto sector slowdown, the company has performed resiliently and have shown their willingness to stay focused on the future. The company has a few subsidiaries which are burning cash at the moment and it remains to be seen whether these operations will start making a profit in the time frame expected by the company. Nonetheless, given their decent performance, Mahindra & Mahindra remains a resilient auto sector stock which every investor interested in UVs, Tractors or electric vehicles should keep an eye out for.
Tata Global Beverages
Tata Global Beverages have put together a formidable brand portfolio operating in both India and abroad. The upcoming merger with the consumer business of TCL should provide a good boost to the company’s reach and product portfolio. The company has been buoyed up by a good performance from the tea business and the Starbucks JV is performing very well so far. The biggest risk for the company remains its over-dependence on tea and other commodity cost prices. Nonetheless, TGB is still a good stock to look out for especially given its resilience in the current stock market slowdown.
Thomas Cook is the biggest travel company in India. They have been innovators in the sector for more than a century now. The company has shown good resilience in operations despite setbacks to the travel industry from the Jet Airways Fiasco and the Sri Lanka attacks. At such a time, when the core holiday business suffered, the other businesses like forex, MICE and corporate travel have risen to fill the void and help the company keep revenues up. The bankruptcy of Cox & Kings has freed up some space in the incumbent travel market which Thomas Cook looks primed to capture. But it remains to be seen whether this incident will negatively affect sentiments for the entire industry and Thomas Cook. Nonetheless, Thomas Cook is a good stock to watch out for, particularly given their industry experience and their widely diversified sources of revenues.
Varun Beverages have been one of the biggest bottlers in India and have been quite proactive in international expansion for some time now. They have successfully acquired exclusive rights for Pepsi bottling and distribution in West and South India which should add to their already large volumes. The company has provided phenomenal operating results in the last quarter mainly due to the start of profitability and huge growth in Morocco operations and the extended summer which has enabled the company to boost sales volumes a lot. The integration of the newly acquired territories has gone better than expected and this is expected to bring higher sales in the near future. It remains to be seen how long the company will be immune to the demand slowdown in the FMCG industry. Nonetheless, based on their strong performance in the last 6 months and their international growth potential, VBL seems like a prime investment to investors of all types. Valuation, though, is a little stretched at current levels.
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