What does ‘Turnaround’ mean
A turnaround is the financial recovery of a company that has been performing poorly for an extended time. To effect a turnaround, a company must acknowledge and identify its problems, consider changes in management, and develop and implement a problem-solving strategy. In some cases, the best strategy may be to cut losses by liquidating the company rather than trying to turn it around.
Some Reasons Company Went Into losses:
We have seen businesses going through a roller coaster ride with companies swinging into profits to losses and vice versa.
- Some companies goes into a loss because of unfavorable macroeconomic situations
While the company that went into the red due to unfavorable macro economic situation can make a strong come back when the economy turns around
- Some companies goes into a loss due to obsolete products and technology
the companies that went into red due to obsolete products and technology would find it difficult to make a comeback unless and until they restructure their product portfolio to compete with their peers.
- Some companies goes into a loss due temporary hike in input costs which the company was not able to pass through because of competition.
Some companies went into losses when the input cost rose so sharply that they were unable to raise their prices and subsequently went into losses. Companies with deep pockets and lower debt tend to survive those situations better than the ones which has high debt equity ratio. Typical example of this is tyre companies which went through the pain due to steep rise in rubber prices a major input cost for the companies in the sector.
Some companies went into diversification into unrelated businesses
Some companies went into diversification into unrelated businesses which is new and the management does not have the knowledge that they possess in their own business. For example there was a mad rush to put up power plants and every company was vying with one another to put up power plants. However, most companies failed as there was a steep increase in prices of coal in the international market when its prices went from about USD 36 per tonne to about USD 120 per tonne. Since most power projects were build on higher debt equity ratio and PPA’s with State Electricity boards were signed for about 25 years with no escalation clause most of the companies projects became unsustainable and were either shelved or dropped. Some companies managed to come out of this trap by selling the power units and returning back to focus on their original businesses and turned around their loss making entities into a profitable one.
Some Examples Of Successfully Turnaround Companies
INDOCOUNT INDUSTRIES: Grown 137 times in 2.5 years
Textile company Indocount Industries went into CDR due to faulty forex management. However the company has turned things around and is now the fastest growing export based textile company in India. The stock was trading at Rs.9.10/- levels in 2013 and had hit a high of Rs.1248.45/- in 2016 giving a return of 137 times in 2.5 years.
NAGARJUNA CONSTRUCTION COMPANY (NCC): Grwon 7 time in 2 years from Rs. 17 to Rs. 118
A company that went into unrelated diversification and went into red due to its decision to put up power plants but successfully sold its non core assets and returned to black was Nagarjuna Construction company(NCC). The company is now concentrating on its core Infrastructure business and has successfully turned around a loss making company. Those who had invested in NCC in 2013 when the stock was trading at around Rs.17/- levels and went on to trade at Rs.118/- levels in 2015 would have made about 7x returns in 2 years.
CEAT: 13 times in 4 years, from Rs 96 in 2012 to 1319 in 2016
However a company which went into the red due to sharp rise in input cost successfully restructured the business aided by softening of input cost and demand pick up was CEAT. The RPG goenka group tyre company was in the red when rubber prices touched a peak of Rs.225/- per kg and the company was unable to increase its prices. However demand pick up and softening of input cost helped the company to turn around. The stock of CEAT which was trading at Rs.96/- in 2012 when it was in the red is today trading at Rs.883/-. The 52 week high for this stock is Rs.1319.90 per share. Typically an investor who had invested in CEAT when it was trading at Rs.96/- and sold it at Rs.1319/- per share would have made an astonishing 13x returns in 4 years.
So that takes us to the question if these turnaround companies are potential multibaggers?. The answer to that question is of course a strong Yes if one goes through their financials and the subsequent increase in their share price.
The first and the most important parameter to watch while making an investment in these companies is to check business fundamentals, which include a demand revival, reduced debt burden and product innovation.
“Investors would be better off if they go by the principle of evaluating opportunities where the turnaround is linked more to improvement in business fundamentals and which is more sustainable,”
Considering the immense potential in turnaround strategies we at sublime has created a new package which we have named “Turn around opportunities”.
We would be not just looking at companies that are currently making losses but also those companies that have just turned around and provides scope for huge capital appreciation. We will look at the size of capital appreciation and would also include companies that have already turned around but still offers huge opportunities.
Time Frame – 3 to 5 Years
Suitability – For medium term investors, HNI’s, Traders, Retail Investors
No. of Calls per annum – 9-10
Frequency – Depending on opportunity (Mostly 2 in one quarter and 1 call in the last quarter)
Mode of Delivery – E-Mail & SMS
Minimum Capital required – Rs.200000/-
Subscription Amount– INR 50 k for 1 year and INR 80 k for 2 Years