Are these turnaround companies a good investment bet? Find out
Since green shoots are clearly visible at the broader level, we decided to focus on stocks that have turned green recently. Among the 1,052 companies that have reported results for the full year ending March 2016, 253 companies reported losses in 2014-15, of these, 100 were able to turnaround in 2015-16. This list is based on annual numbers.
If you see it on a quarterly basis, you will notice that different companies have turned around in different quarters. For example, MRPL turned around in the third quarter of 2015-16 and its last big quarterly loss was during the second quarter of 2015-16. Huge inventory losses due to the sudden fall in crude oil prices in that quarter was the main reason for this.
“In addition to the lack of inventory losses, improvement in refining margins is also helping independent refiners,” says Saravana Kumar, Chief Investment Officer, LIC Mutual Fund. MRPL’s gross refining margin has gone up to $9 (Rs 605) per barrel in the fourth quarter from $8.4 (Rs 564) per barrel in the third quarter. Since MRPL is sourcing most of its crude from Iran, the removal of economic sanction on Iran and free availability of crude is another positive factor for this refinery, and its capacity utilisation may go up further in the coming quarters.
Aviation stocks such as SpiceJet have turned around because of the fall in crude prices. Since aviation fuel constitutes around 40% of the operating cost of these companies, the fall in aviation fuel prices have benefited airlines the most. Though the fall has helped both budget and full-service carriers, experts are more bullish on budget airlines. “The passenger revenue and passenger load factor is increasing for low-cost airlines,” says Kumar.However, with crude prices firming up again—trading around $45 (Rs 3,019) per barrel—will airlines’ profitability in the coming years be jeopardised? “Lowcost airlines will continue to make money, as long as crude remains below $60 (Rs 4,026),” says Kumar. However, experts are not bullish on this sector from a long-term perspective. “Aviation is not a secular growth industry where everyone is making profit in all years. This is the global situation and it should not be different in India,” says Dua. So, investors betting on this up cyclical should time their exit correctly.
Sugar is another sector that has shown a turnaround in 2015-16. Two major players, Balrampur Chini and Dhampur Sugar, turned profitable in 2015-16 after reporting losses in 2014-15. “Increase in global sugar price and low production yield in India are the reasons for this. Indian sugar companies are benefiting now because the price of imported sugar is high,” says Kumar.
Here again, investors need to play the sugar cycle correctly. “The sugar cycle is short and will last only a few years,” says Dua. This is because sugar is a short duration crop and high sugar price in one year results in an increased sugarcane cultivation in the subsequent year. This is possibly why analysts are expecting bumper profit for sugar companies in 2016-17, but are unsure of their 2017-18 performance.
Fall in interest cost in 2015-16 has helped companies’ turnaround. For example, the interest cost of SpiceJet came down by Rs 48 crore in 2015-16 compared to 2014-15. Similarly, the interest cost of Chennai Petro and Balrampur Chini came down by Rs 95 crore and Rs 26 crore respectively. Despite a major jump in interest cost, Adani Power was able to report a smart turnaround in 2015-16. High pay load factor (a measure of capacity utilisation)—79.5% in fourth quarter of 2015-16—lower fuel cost and the benefit of higher compensatory tariff brought about this turnaround.
On a quarterly basis, Adani Power turned around in the third quarter. However, experts are still concerned about the company’s high debt. To mitigate this, promoters have infused Rs 1,100 crore in 2015-16 and plan to invest another Rs 1,700 crore in 2016-17. This will bring down Adani Power’s debt-equity ratio from 7.1 in March 2016 to 5.8 by March 2017.