One strategy that many investors deploy is betting on turnarounds including myself and I am always on the lookout for a turnaround as that creates maximum wealth in the shortest period of time.
Now what I have experienced is that there are two types of turnarounds:
1. Business Turnaround
2. Sentiment Turnaround
Now what is Business Turnaround? Business Turnaround strategy is to invest in companies who are facing business related troubles either due to general industry problems or company specific problems. The financials in such companies deteriorate massively and the stock prices sometimes collapse 70-80-90%.
For example I started investing in Tata Motors DVR in 2019 when the CV cycle in India was going through trouble, their passenger vehicle segment was behind competition and their JLR operations were also having troubles overseas. My bet was on tata and change in CFO to steer the ship through the mess and stage a turnaround. By 2023 the turnaround did happen, and the company posted a net profit of over 2000 crores after 4 consecutive years of over 10000 crores losses. In fy 24 they did a profit of 31807 crores. That was some turnaround from a staggering loss of -28724 crores in fy-19.
Top to Bottom the stock went from 65 to 1100 levels, a 1700% rally. I managed to achieve a decent portion of that.
Another example that i reaped benefit from was Hindalco during 2015 crisis of aluminum price crash. Top to bottom the stock went from 60 to 750 in 10 years.
Note: Business Turnarounds are very difficult and most businesses rarely turnaround.
Under Business Turnaround there are two categories:
1. Industry Turnaround - Whole industry is suffering financially and generating very low return on capital or making losses. Example Sugar industry in 2018. Entire aluminum industry in 2015. Entire crude producers in 2020 etc. Such turnarounds depend on intensity of reduction in competition or govt interventions. Here the maximum money is made by the worst player in terms of stock appreciation.
2. Company Turnaround: Here Industry is doing ok and other players in the industry are doing well financially but the company is suffering due to its own internal issues. Tata motors was a company specific issue. Some issues were at industry level also but Ashok leyland was doing very well in CV, Maruti was doing very well in PV and Mercedes/audi/bmw/volvo was doing well in luxury but Tata Motors was suffering in every segment. But tata management pulled the company out of rut by tough interventions. In company turnaround the management strength and quality is the most important factor. Financially sound promoter is a must in such cases or else the company will head to bankruptcy.
What is Sentiment Turnaround then? Now here the business is doing fine but the sentiment around the company has turned sour for some reasons. Now this is a relatively easier bet than business turnarounds and also yields faster result. Sentiments can turn sour for many reasons such as news of raids, rumor of promoters involved in something or the other, perception of management or promoter taking advantage of minority shareholders etc.
Past examples that I can remember is Raid news on Hero MotoCorp, FDA issues of Divis lab, minority shareholders unfriendly perception about Vedanta etc They all turned around within 1-2 years.
Why this turnaround works faster? Human memory is too short and stock price is driven by fundamentals and earnings. Since business was never an issue in this case and it was just the sentiment issue people forget the past issue and focus on earnings and prospect. A live example is Kedarnath Incident. The very next year crowds were again at kedarnath inspite of such catastrophe. People forget fast and thats why this is my Favourite.
Indusind Bank is exactly going through a sentiment turnaround phase. Business is good, overall private banking space is making newer highs, RBI is softer relatively and a big growth in credit is coming in fy 26. Business wise it should not face any trouble in make money more than fy24 of 8950 crores. That will make people forget and take the stock a lot higher.
No comments:
Post a Comment