High conviction Investment Ideas with a track record

Gujarat Narmada Valley Fertilizers & Chemicals Limited (GNFC), is a joint sector enterprise promoted by the Gujarat State Investments Limited (GSIL), a Government of Gujarat undertaking, and the Gujarat State Fertilizers & Chemicals Ltd.(GSFC).

GNFC is into the manufacturing and marketing of fertilizers, pesticides, and industrial chemicals and also has an IT products division. Even though its production of plants was affected by covid its Ammonia, Urea, Methyl Formate, Acetic acid and Ethyl acetate were running at 100% capacity. It has a high market share in the chemicals it operates in. The Chemical business contributes 64.4% to the revenue whereas Fertilizers contribute 34.4%. The company has posted an impressive 5 years ROCE and ROE of 14.6% and 13% respectively.

Consolidation break out and a new all time high with big surge in the volumes hinting at bullish trend continuation and risk reward for a Long trade very attractive.

Linde India Limited, a subsidiary of BOC Group,UK (owns 75% stake in the co), is primarily engaged in manufacture of industrial and medical gases and construction of cryogenic and non cryogenic air separation plants. The company deals in gas and related products which is supplied to large industrial companies.

Along with this Linde is into supply of quality pharmaceutical gases such as medical oxygen nitrous oxide among others. It also deals in project engineering division. The company has 14 manufacturing units and the order book for PED more than Rs. 1100 crores as of 31st December, 2022. The company has major clients such as HPCL, IOCL, BPCL, ONGC, GAIL, MRPL,HMEL, CPCL, Tata, SAIL, JSW.

Linde has a RoE of 12.4% while it has a RoCE of 17.1%. he operating margins of the company stand at 25.9%, while the 3 year profit CAGR is 129%.

Stock has come out from approx 90 days consolidation supported by healthy volumes, Stock is now trading near ATH and short term trend has turned bullish. Downside is likely to remain capped at 2300.

Laurus Labs is principally engaged in offering a broad and integrated portfolio of Active Pharmaceuticals Ingredients (API) including intermediates, Generic Finished dosage forms (FDF) and Contract Research services to cater to the needs of the global pharmaceutical industry.  

The company is a leading ARV API manufacturer with 50% API revenue contributed from the ARV business, followed by Oncology API. Laurus is expanding into finished dose form business and CDMO space. The company is intending to expand its CDMO space and even deals in Nutraceuticals. Laurus has Aurobindo, Natco as their customer. It has a RoE of 42.3%, while it has a RoCE of 38.4%. The margins of the company stand at 29.1%.

Stock has formed double bottom formation on the daily timeframe, and witness big bullish candle with high volumes at the support cluster, as well as oversold in the short term. A quick bounce is very much possible.

Suven Pharma is in the business of Contract development & manufacturing organisation (CDMO), catering to the needs of global Pharma Industry. Suven is engaged high value and margin accretive molecule NCE.

The intermediates are supplied for 4 segments such as women's health, diabetes, depression and rheumatoid arthritis. This segment contributes 78% of the revenue.

The company has a strong order book with new clients being consistently added. Most clients are the Big Pharma companies in Europe and the US. The company has already spent a Capex of Rs.94cr in 9MFY21 to expand its existing manufacturing facilities. Company has planned for a capex of Rs 600cr, a large part of which will be utilized in facility upgradation, technology enhancement and relocation spread over 3 years. This will be over and above the current ongoing capex of Rs.320cr spent over FY19-21. The capex is to expand the exisiting facility in order to serve the customer better.

The stock has become oversold in the short term, whereas the support zone of 450 on the downside is very strong. Stock is likely to witness a quick boucne atleast upto immediate resistance of 570

Balrampur Chini Mills Limited founded in 1975, is one of the largest sugar manufacturing company in India. It is one of the first sugar companies in the country to diversify its business from sugar to distillery and cogeneration.

With a deep and profound sectorial understanding, the Company's innovative approach to manufacturing has enabled it to successfully create a wide range of co-products ranging from Molasses, Alcohol, Ethanol and Bagasse to Power Generation. The Company's aspirations and vision are led by Mr Vivek Saraogi. He is the former President of the Indian Sugar Mills Association and has also worked as committee member of FICCI and the Indian Chamber of Commerce in Kolkata. His stewardship enabled the Company to soar to new heights.

The Company has grown its capacity by well-planned capacity expansion projects and the acquisition of existing companies over recent years. Balrampur Chini Mills possesses a cane crushing capacity of 76,500 tonnes per day, distillery capacity of 560 KL per day and saleable co-generation capacity of 168.70 megawatts.

Given the company's remarkable financials, it has been the wealth creator for the investors as it delivered excellent ROCE at 18% and robust ROE at 25%, over the last 5 years. In fact, it has registered a profit growth of 36% CAGR in the past 5 years.

Stock has come out of 60 days consolidation and broke above the crucial resistance of 400 decisively with decent volumes. Stock is likely to contnue the major uptrend.

INOX Leisure Limited (INOX) is one of India's major multiplex operators, having been founded in 1999. Its state-of-the-art theatres, which feature high-definition visual and audio, exceptional customer service, and distinctive architecture and ambiance, enabling the firm to set new standards for movie going.

ILL is the second-largest multiplex operator in the United States, with 654 screens spread over 155 locations. Its ability to maintain ticket pricing reflects its strong market position (average ticket price was Rs 200 in fiscal 2020, against Rs 197 in fiscal 2019). The rate of new screen additions is projected to stay low for some time and will be determined by the ramp-up in occupancy over the next 2-3 months, following the easing of operating limitations.

ILL's operating margin remained solid in fiscal 2020, at roughly 18 percent, compared to around 19 percent in fiscal 2019, despite operations ceasing in the second part of March 2020. Aside from box office receipts, revenue from other categories increased. For example, the advertisement segment's revenue share increased to 9.3 percent in fiscal 2020 from 6.5 percent in fiscal 2014, while the food and beverage segment's revenue share increased to roughly 26% in fiscal 2020 from 21.3 percent in fiscal 2014.

Due to the second wave of Covid-19, operating performance was hampered in fiscal 2021 and has remained modest during the first half of fiscal 2022.

As part of the INOX group, ILL has a lot of financial flexibility. Furthermore, its great ability to raise cash from capital markets supports its financial risk profile.

As of March 31, 2020, the gearing and net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratios were both robust at 0.14 and 0.3 times, respectively, while the interest coverage ratio remained strong over 30 times.

Profitability fluctuations, which are inherent in the film exhibition sector, will continue to have an impact on operations, albeit the impact should be mitigated to some extent by the company's size and diversification of revenue sources. Given their large, fixed expenses, multiplex operators should continue to rely on occupancy, which is determined by the popularity of films. Other forms of entertainment, as well as new content delivery channels, such as over-the-top, will continue to put the company's profitability and growth at risk.

Incorporated in 1989, Tata Elxsi Limited predominantly designs and develops systems and software for industry verticals such as automotive, aerospace, broadcast, communication, consumer electronics and semiconductors. It also provides systems integration and industrial design services across industries. The larger business segment - Software Development & Services - can be further categorised into the Embedded Product Design (EPD) and Industrial Design & Visualisation (IDV) divisions. While the EPD division provides hardware, software and embedded system designs and development services across the product lifecycle, the IDV division addresses the industrial design, user experience and service design, branding and digital content marketing requirements of customers. TEL, headquartered in Bangalore, has a presence across the US, Europe, Asia Pacific and Japan. In India, the company has global development centres and studios in cities like Bangalore, Thiruvananthapuram, Mumbai and Pune.

Today, Tata Elxsi is recognized as a premium engineering service provider worldwide and amongst the leaders in the automotive, media, broadcast, communications, and healthcare industries.

Credit Strengths

Long-standing presence in designing and development of systems and software for varied end-user industries

Strong business profile supported by diversified geographical presence, reputed clientele and professional management team

Robust financial profile with stable earnings, debt-free status and strong cash reserves

Pros

- Above Average Sustainable RoE

The company generates a sustainable return on equity greater than the expected cost of capital which implies that the underlying business can create and compound value over a period time due to it's ability to generate above average return on capital.

- Great Cash Conversion of Profits

The business has a great cash conversion ratio since it is able to convert a signifant portion of operating earnings of 77.62% into operating cash flow. This implies a great working capital cycle and large cash flows for either funding growth or dividends. This shall positively impact shareholder returns.

- High Pricing Power

The business enjoys a relatively high pricing power and is able to withstand competitive pressure which works as a great moat for equity shareholders of the company.

- Asset Light Business

The company operates a great asset light business with a high Asset turnover ratio of 10.73. A high asset turnover ratio is a great driver of RoE and can improve shareholder returns. A relatively higher asset turnover ratio also will result in lower dilution as the business grows its revenues as earnings.

- Zero Debt

The company has almost nil to negligible debt to equity ratio of 0.08. Considering the fact that the business is debt free, equity shareholders shall carry lower risk of holding the stock.

Cons

- Highly Cyclical Industry

The company operates an extremely cyclical business with unpredictable earnings and cash flows. This shall result in very high stock price volatility and returns which would negatively impact shareholder returns.

- Poor Capital Allocation

The company has disproportionately high amount of assets locked up in working capital, cash and cash equivalents, loans and advances, etc to the extent of 87.41 % of total assets. This reflects poorly on the capital allocation strategy of the management which negatively impacts shareholder returns.

- Low Shareholder Pedigree

The company has a very poor long term shareholder base and large part of the shareholders are short term shareholders. This increases stock volatlity and the high speculative activity works negatively for long term shareholders of the company.

- Negative Margin of Safety

The relative margin of safety of investing in the company is low due to a recent sharp run up in stock prices.

Blue Star is an industry leader in central air conditioning and commercial refrigeration, synonymous with innovation, quality, and world-class customer experiences, throughout several countries across the globe.

With over 75 years of expertise in providing cooling solutions, the company is India's leading air conditioning and commercial refrigeration company. They have also forayed into the residential water purifiers business with a stylish and differentiated range including India's first RO+UV Hot & Cold water purifier; as well as the air purifiers and air coolers businesses.

With a vast and premium range of products that are technologically adept, energy-efficient, and stylishly designed, Blue Star offerings are spread across the residential, commercial, and corporate applications, with every third commercial building in the country installed with Blue Star products.

The company's operations can be classified in to three segments, namely Electro Mechanical Projects and Packaged Air Conditioning Systems (EMP), unitary products (UP) and PE&IS each contributing 52%, 44% and 4% to the consolidated net sales of the company in FY 2020, respectively. It has presence in 19 international markets in the Middle East, Africa and South Asia.

Pros

Above Average Sustainable RoE

The company generates a sustainable return on equity greater than the expected cost of capital which implies that the underlying business can create and compound value over a period time due to it's ability to generate above-average return on capital.

Great Cash Conversion of Profits

The business has a great cash conversion ratio since it is able to convert a significant portion of operating earnings of 115.89% into operating cash flow. This implies a great working capital cycle and large cash flows for either funding growth or dividends. This shall positively impact shareholder returns.

Asset Light Business

The company operates a great asset-light business with a high Asset turnover ratio of 11.58. A high asset turnover ratio is a great driver of RoE and can improve shareholder returns. A relatively higher asset turnover ratio also will result in lower dilution as the business grows its revenues as earnings.

Cons

Low Return on Capital Employed

The company is unable to generate sufficient return on capital employed which impairs it's ability to generate high return for shareholders after accounting for taxes, interest and other non-equity stakeholders.

Low-Interest Coverage

It has a very low Interest coverage ratio of 3.69 times which implies that a large portion of operating profits are getting attributed to payment of interest to debtholders. This leaves lower earnings and cash flows for equity shareholders which is negative for returns.

Highly Cyclical Industry

The company operates an extremely cyclical business with unpredictable earnings and cash flows. This shall result in very high stock price volatility and returns which would negatively impact shareholder returns.

Low Pricing Power & High Competition

The business has extremely low pricing power and is vulnerable to competitive pressure which can significantly impact shareholder returns.

Poor Capital Allocation

The company has disproportionately high amount of assets locked up in working capital, cash and cash equivalents, loans and advances, etc to the extent of 84.50 % of total assets. This reflects poorly on the capital allocation strategy of the management which negatively impacts shareholder returns.

Poor Working Capital Cycle

The business has a very poor working capital cycle of 113 days which requires very high investments in working capital. This reduces free cash flow generation for the business and negatively impacts shareholder value and returns.