Multibagger Recommendation Vikas Ecotech generated 100% return! What’s Next?
A high growth company can’t trade at a cheap valuation unless there are some operational concerns. However, if those operational concerns are not significant enough then the same stock can generate the multibagger return. Similar was the case with Vikas Ecotech. The company had a strong business model offering eco-friendly and technologically superior products to the world with good future prospect due to Govt initiative towards green environment. But was facing challenges due to high debt-equity ratio and higher receivables, and thus was trading at a cheap valuation. What we noted that high D/E ratio was due to capacity expansion plans. Moreover, since the company was growing at a fast pace, high receivables were somewhat justified. Further, the management was targeting 35%-40% CAGR revenue growth with margin improvement over the next 3 yrs. Also, the capacity expansion plans were expected to fuel the growth. Hence, we expected the challenges faced by Vikas Ecotech to be temporary and recommended it to our paid members on 3rd August 2016 at Rs 14.70 with the target price of Rs 30 by 2017. The stock price dropped by around 20-25% soon after the recommendation, providing ample investment opportunity to our members. The stock price has touched our target recently providing 114% tax-free return to our members within 16 months.
To understand the future potential of Vikas Ecotech, let’s have a look at the rationale presented to our members at the time of recommendation:
Investment Rationale presented at the time of recommendation (3rd August 2016)
The primary reason for recommending Vikas Ecotech was because of its presence in high growth segment with considerable margin expansion expected over next few yrs. Thus, we expected the multi-bagger return from the stock based on EPS growth with PE re-rating. Other point’s for consideration were:
- High Growth – Vikas Ecotech is a high-end specialty chemical manufacturer focused on eco-friendly and technologically superior products that have a wide range of application in sectors like footwear, automobiles, pipes, irrigation, packaging, textiles and healthcare. Manufacturing activity contributes 80% of the revenue and the remaining from trading activities. The company is adding value-added high margin products to sustain the growth level. Management is targeting 35%-40% CAGR revenue growth rate with margin increment over the next 3 years. Current capacity utilization stands at around 50%. The new plant at Dahej (Gujarat) is also expected to start operation to fuel the growth rate. Even if the management can maintain the lower end of the growth guidance then also the stock is going to become multi-bagger within the next few years.
- Visionary promoter – Vikas Garg (Promoter and MD of Vikas EcoTech) has high ambition and is hungry for growth. Before the recommendation, promoter group had increased their stake during Jan-Mar 2016 by around 5%. Further, on 7th July 2016 Jayant Chadda (Promoter of Prince Pipes and Fittings) purchased around 63 Lacs shares from Vikas Garg and his associates. Prince Pipes and Fittings is one of the major customers of Vikas Ecotech. There were multiple block deals and bulk deals over the 6 months before recommendation indicating the participation of some big players. During February 2016, Merill Lynch (FII) purchased 19 Lacs shares of the company at Rs. 20.85 per share. So, the stock was also catching the attention from FIIs.
- Concerns – Due to the capacity expansion, the debt level is on a little higher side. At the end of FY16, debt to equity ratio stands at 1.3 (although reducing at a great pace over the last 3 years). Once the Dahej plant starts operation, the debt to equity ratio is expected to come down further. The cash flow from operation is not good enough for the last 3 years but improving over the last few quarters. Total receivables are also on the higher side. However, any company that is growing at such high rate (but available at reasonable valuation) must have similar associated concerns.
- Reasonable Valuation – At the current market rate of Rs.14.70, the stock is traded at P.E of 14.7. Our net profit and EPS estimate are 40-45 Crores and 1.6-1.7 respectively for FY17. We are also expecting another 35%-40% growth in FY18 that would result in EPS of around 2.2. Assigning the PE multiple of 14, the target price of Rs. 30 is coming. Investors can invest up to 5% of the portfolio at the current rate (below 15.50) and the remaining at any correction to 12.50 level.
The above is a short investment rationale that was shared on 3rd August 2016. The full write-up is visible to the paid members under “Members Zone”.
Vikas Ecotech- 100% return already achieved- What’s next?
Although the stock has generated 100% return, still fundamentals are strong enough. Moreover, the recent announcement of demerger of low margin business from high margin business is expected to unlock value for shareholders. Our initial investment rationale is already factored into the stock price. Hence profit booking call was shared at Rs 30. Going forward, the stock is expected to provide 20%-30% annualized return for the above mentioned positive factors.
Looking for a similar recommendation like Vikas Ecotech?
We recommend stocks having strong fundamentals after thorough analysis and due diligence. Past recommendations beside Vikas Ecotech that have given similar returns include Sanwaria Consumers (3 times return in 5 months), Bodal Chemicals (128% return in 15 months), Future Enterprise (87% return in 4 months), Century Ply (63% return in 3 months), Caplin Point Lab (110% return in 5 months). The list also includes stocks like Can Fin Homes, Ajanta Pharma, Suprajit Engineering, Atul Auto, Mayur Uniquoters, Torrent Pharma, and many others. Click here to check return generated by all our past recommendation.
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