Many investors don’t believe in investing in such stocks, but others absolutely love them. They argue that everyone should invest in turnaround stocks as they are immense wealth creators.
So, which side is right? Should you invest in turnaround stocks or stay away from them?
Well, my own view is that there are good turnaround stocks and bad turnaround stocks. The good ones are of companies that have a strong financial history, impressive return ratios and solid balance sheets, but have run into short-term problems. Such companies are expected to overcome their problems in a couple of years and get back on their long-term growth path.
If such stocks are available at attractive valuations, one should certainly consider buying them and ride the turnaround as they often create huge wealth for investors in a short period.
Bad turnaround stocks, on the other hand, are those of companies that have a poor financial history, low return ratios, and perhaps also a significant amount of debt on their balance sheets. If such stocks are being touted by financial gurus and experts as turnaround candidates, one should approach them with caution. Yes, some of these stocks can also go on to become huge multibaggers, but in my view it is difficult to separate luck from skill in such turnaround plays and this can land you in serious trouble over the long term.
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In investing, skill should play the primary role and luck the secondary role. If you allow luck to play the primary role, which is usually the case with bad turnaround stocks, you are asking for trouble.
Today we will talk about three good turnaround stocks that you can add to your watch list.
KRBL Ltd
The company hasn’t performed well in the past few quarters.
Profits were down around 15% in FY24, and another 56% year-on-year during the June quarter. This has caused the stock to drop more than 25% over the past year.
We believe KRBL is a good turnaround stock because of the company’s solid fundamentals and good long-term prospects.
Incorporated in 1993, KRBL has grown manifold in terms of revenue and operations. The company has 14 rice brands under its banner.
India Gate, its flagship brand, is quite popular in India and abroad, and delivered 58% of the company’s total revenue in FY24. Unity, a lower-priced brand of basmati rice, contributed 15% of total revenue in FY24.
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KRBL has a strong presence in Middle East countries such as Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain. The Middle East accounted for nearly 58% of its total exports in FY24, and KRBL is among the largest branded basmati rice companies in these countries. The company’s balance sheet is almost debt-free and it regularly shares some of its profits with shareholders through dividends.
In view of the company’s strong market position and its impressive track record, one could expect KRBL to stage a strong turnaround.
Bajaj Consumer Care Ltd
The stock is down more than 20% from its 52-week high of almost ₹300, partly because of its mediocre performance of late.
Bajaj Consumer last made a profit of more than ₹200 crore back in FY21. It has been all downhill since then as profit has now shrunk to ₹150 crore on a trailing 12-month basis.
Fundamentally, though, the company is certainly on a sound footing. Bajaj Consumer is a market leader, with its Almond Drops hair oil commanding a share of more than 63% in the light hair oil market as of March 2024. It commands strong brand loyalty and the market has high barriers to entry. The company has a wide geographical presence and a distribution network covering more than 4.3 million retail outlets.
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The company is focused on increasing its share from products other than hair oil by launching serums, shampoos, conditioners, soaps and body lotions. It spends vigorously on advertising to increase its reach and has undertaken various initiatives to improve its direct reach to consumers. The strong recall of the Bajaj brand also helps maintain its market dominance.
A wider product portfolio and a strong distribution reach with a focus on modern trade and e-commerce should support revenue growth over the medium term.
Valuations aren’t very demanding either, with the stock trading at a trailing 12-month price-to-earnings (PE) ratio of 22, close to its long-term average of around 23x.
Valiant Organics Ltd
Established in 1984 as Valiant Chemical Corporation before being renamed to Valiant Organics Limited (VOL) in 2005, the company is in the business of manufacturing specialty chemicals.
VOL’s promoters have been in the chemical intermediates business for more than three decades, which has allowed them to develop strong understanding of market dynamics and establish healthy relations with customers and suppliers.
VOL has a diversified business profile in terms of products, geography, industries and customers. The stock hasn’t performed well over the past year, though. It’s down almost 20% thanks to poor financial performance. The company incurred a small loss in FY24. However, it did well in previous years, earning a profit of ₹120 crore consistently.
It has a strong balance sheet, with overall debt much lower than equity.
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As the company’s managing director said on a conference call a few months ago, there has been significant pressure across the board owing to various factors related to the global slowdown, mainly in Europe. There is also the problem of Chinese dumping.
Hence, it expected FY24 to be a stabilising year. Things should start looking up from FY25 as the market rationalises and new products are launched. As revenues and profits improve, the share price should also follow suit.
Please note that these stocks are not recommendations, and investors should do their own research and due diligence before investing in them.
The common feature of these three stocks is what I call “Heads I win, tails I don’t lose much” – meaning they have greater potential for upside than downside.
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Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
