It is a tough game, and the road to success is littered with markers for those who fell by the wayside. Some did not have it in them. Others made it big, but could not weather the storm. But out there is a rare breed of companies who made it back after being down and out. Investors could bet on this resilient group that holds the potential to create immense wealth, says the ET Intelligence Group
When the going gets tough for a company, it is natural for its stock price to react negatively. It could be one major problem or a fatal cocktail -- mounting losses, a surge in debts or erosion in market value. And the result could be disastrous. Whether the company tides over the hurdles and stays in business or goes bust depends on the nature and quantum of the adverse pressures. Many fail to hang on. But a few make it back after an arduous struggle that at times seems like a lost battle. Investors would do well to watch out for these turnaround stars that hold the promise of becoming multi-baggers.
But don't take things at face value. Before betting on a turnaround candidate, an investor should always try to figure out the reasons behind the target's ailment and what it is doing to cure it. A company could have made a costly acquisition or been too aggressive in its growth plans. It could be saddled with a bad product or have just been in the wrong place at the wrong time — taken down by an industry-wide problem. An investor should study the steps the company has taken or is taking to come out of the tight spot before putting any money in it. After all, the number of failures is always larger than those who live through the darkness to see the light at the end of the tunnel. Get it right, and you can rake it in. The right pick is sure to earn you high rewards in the end. For example, the scrip of Shoppers Stop touched a high of around 300 in January 2008 before crashing to 40 after it faced two consecutive years of losses in FY08 and FY09. However, after the company turned profitable it has regained all its value and is currently trading at 470. That's a return of almost 12 times from its bottom level. Pantaloon Retail is another such example. The company saw strong growth till 2005. It diversified into multiple businesses such as insurance, logistics and financial services. Since then, the company's profits gradually declined and eventually it became a loss making company in 2008. The key for an investor is to identify a 'real' turnaround company. So how does one do just that? There's no magic formula, but we will list a few things that an investor should keep in mind. We will show you how to separate the real gems from the stones and evaluate what can lead to real turnaround in a loss-making company. During a period of loss, generally all companies move to reduce costs. Depending on the quantum of loss, a few may also go in for financial restructuring and sale of non-core assets. While cutting costs and rationalising sales are measures adopted to correct minor problems, major and chronic problems need total restructuring. For a company that has amassed a large quantity of loans that hinder its performance, a debt restructuring can lend a hand. For example, last year Kingfisher Airlines underwent a successful debt restructuring that converted a chunk of its debt into equity and eased repayment terms on the rest. The company is still to report any profit, but the restructuring will help to ensure it does not choke on interest payments.
It helps to bet on companies that have a healthy business model and strong parental support. For example, Tata Motors and Tata Steel — the two flagship companies from the Tata group turned loss-making in FY09 and FY10, respectively. However, their strong fundamentals ensured that they remained in the red for just one year.
Loss-making companies that are likely to return to profitability always intrigue value investors. The dilemma is when to invest in a potential turnaround candidate. Enter late when the turnaround is confirmed and most of the juice would have already vanished; enter early and the inherent risk of a failure is too high.
In this article, we have tried to look at a few companies which have posted some profits after a series of losses and hence can be considered likely candidates for a turnaround. However, they come with varying degrees of uncertainty. An investor needs to understand that some challenges still remain and the sustainabiliy of initial signs of profits will depend on getting several things right.
From a 300 crore loss year ago to a 17crore profit that Punj Lloyd reported for Mar ‘11 quarter marks its turnaround. Higher other operating income and higher revenues of its overseas subsidiary made this possible. It is carrying a huge order book, but is unable to translate it in earnings growth due to unresolved issues with its clients. But the turnaround has been acknowledged by the markets as its scrip gained 22% in last one month outperforming its peers. Consistent execution of orders in the coming quarters is crucial for the company.
Despite being the first entrant in the direct-to-home (DTH), Dish TV has been making losses due to slow customer adoption of digital services and high equipment costs. This is changing fast with consumer awareness rising. It has been able to differentiate from the competition thanks to its unique offerings such as the introduction of 30 HD (high definition) channels. It has consistently reduced its quarterly losses and is likely to post first profits in FY12. Govt’s push for rapid digitisation of cable services provides it with sustainable growth opportunity.
After seven quarterly losses, Suzlon Energy finally reported a profit of 431 crore in the March ‘11 quarter. Still, 109 crore of it came from accounting adjustments and 220 crore from forex gains. It carries a huge order book of 30,100 crore and projects 44% revenue growth in FY12. Yet challenges are huge. 12,500 crore of debt burden means its interest cost will remain high. FCCBs issued in 2007 need to be repaid in FY12. Nearly 1,000 crore of debts have remained unrecovered for long. Passing these hurdles is key to sustainable profitability.
Wockhardt returned to profits in FY11 after huge losses for three consecutive years. A series of high-cost overseas acquisitions between FY03 and FY08 was . A huge debt position and derivative bets that went bad almost sank the ship. It has undergone a major financial restructuring and sold various businesses. Although the company is generating operating profits, several ongoing litigations against it are a key risk. One legal battle has blocked its plans to sell off the nutrition business, which would substantially reduce its debt. The company's ability to address these issues, while growing businesses holds the key to its sustained profitability.
Breaking its long run of losses Southern Petrochemicals Industries (SPIC) posted a Rs 82-crore net profit in FY11 primarily due to disposal of assets. But the company had posted healthy operating profits in the last quarter of FY11. It has successfully undergone a debt restructuring and the promoters also infused Rs 50 crore in FY11. The company commissioned its urea plant in October 2010 which has boosted its revenues. Negative net worth and a huge debt burden are key challenges, which SPIC needs to cope with to report sustainable profits in coming quarters. The scrip has already gained over 60% in last three months.
Most business segments of diversified DCM Shriram Consolidated faced tough times in the first three quarters of FY11. Its revenues have stagnated over last two years. The management restructured its operations to improve profitability. It closed down a few agri-retailing units, improved inventory management and is expanding PVC capacity. Improved realisations from its farm solutions business and higher sugar prices enabled it to turnaround in the March 2011 quarter. However, the company’s ability to sustain its profits in coming quarters needs to be seen.
Unfavourable government policy on yarn exports impacted yarn-maker Spentex. Its net profit in FY11 came after three consecutive quarters of losses. It also brought down its debtto-equity ratio to 5.1 from 6.3 last year. The scrip is trading at 2.8 times its profits of last 12 months, which is inexpensive compared to peers. Overall increase in demand from the textile industry is the key positive.
Dry-docking expenses and low utilisation rates resulted in five quarterly losses for Seamec. Still it remains debt-free with cash representing almost two-thirds of its 310-crore market capitalisation. The full availability of all its vessels in FY12 will be a key positive, which is expected to help it turn profitable once again. Overall weakness in charter rates remains a key challenge.
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