Legendary billionaire investor Warren Buffett once said: “Turnarounds seldom turn around”. MOFSL in its 29th Annual wealth creation study said the biggest risk to investing in troubled companies or potential turnarounds is the mortality of the companies invested in i.e. permanent capital loss. The best – if not the only – way to make turnarounds work is by investing in bruised blue chips — large companies with a very strong track record, currently going through troubled times, the domestic brokerage insisted.
There has been instances of bruised blue chip stocks making a strong comeback after eroding investor money. For example Suzlon Energy Ltd, Mahindra & Mahindra Ltd (M&M), Jindal Steel and Power Ltd and CG Power. MOFSL has come out with a basic watchlist of 2024 blue chips, which are down 30 per cent or more from their 5-year highs.
It included Indian Railway Catering & Tourism Corporation Ltd (IRCTC), Adani Total Gas Ltd, Adani Enterprises Ltd, Gujarat Gas, SBI Card and Tata Exlsi. Others in the list included Avenue Supermarts (DMart), Berger Paints and Asian Paints. These stocks are down up to 80 per cent from their five-year highs. Can these stocks stage a rebound?
There are several instances of rebounds in blue chips in the past. For example M&M’s share price declined over 50 per cent between FY14 and FY20 led by the operational inefficiencies in the business, weak capital allocation plans and some impact of COVID. Since then, the stock is almost 12 times its Covid low.
In another instance, Suzlon Energy shares fell 96 per cent in a span of just five years ending 2020.Since then, the stock is up 42 times on the back of a turnaround in its financials.
Jindal Steel corrected from the peak of Rs 690 per share in September 2010 to Rs 60 per share in March 2016 due to coal block regulatory issue and debt burden. The stock price continued to remain volatile from FY17-20 as the company struggled due to overcapacity in the steel industry and high debt. From FY21 onwards, the Jindal steel stock began to recover supported by robust infrastructure spending and higher steel prices, and sale of non-core asset led deleveraging. At present, the stock is hovering around its all-time high of Rs 1,097.
In another example, MOFSL noted that the improvement in Bharti Airtel’s operating and financial performance, has also been handsomely rewarded by the stock markets, with its shares compounding annually at 40 per cent from its 2009 low.
While blue chips are stocks of large companies with a reputation for quality, reliability, and the ability to operate profitably in both good and bad times, occasionally they get bruised and their stock price sees a meaningful fall.
“Such bruising offers a golden opportunity to build large positions in the stock (assuming there is no structural decline in the Blue Chip’s fundamentals). Multiple case studies of bruised blue chips suggest certain common causes for their bruising and triggers for their subsequent recovery,” MOFSL said.
MOFSL advised investors to create a watchlist; await buying triggers, mainly sector tailwind and change of management; and ‘Buy’ bruised stocks at attractive valuations, typically at price-to-book ratio of less than 2 times.
MOFSL said blue chips today are richly-valued. The average FY24 PE of 68 blue chips was as high as 40 times, 60 per cent higher than the Nifty 50 PE of around 25 times. Under normal or elevated market conditions, given their several positive attributes, blue chips are unlikely to be available at reasonable price, MOFSL concluded.
“Hence the need for blue chips to be “bruised”, as a golden entry point,” it said.
It gave an example of Cummins India was trading at a PE of 26 times at its high price, but that collapsed to 13 times at its low price. Likewise, its price-to-book ratio contracted from 6.1 times to 2.1 times. Bank of Baroda, M&M, Glenmark Pharma, NTPC, GAIL, Engineers India, Shriram Finance, Sun Pharma and Jindal Steel are some other stocks which fell up to 94 per cent from high to low, before climbing up to 81 per cent.
MOFSL said there were 99 bruised blue chips in its study of seven rolling 10-year periods ending 2018 to 2024. Of these, every single company continues to exist today. Thus, by investing in bruised blue chips, mortality is near-zero and the risk of permanent loss of capital is low, it said.
“Bruising alone cannot be the sole reason for buying into a blue chip. Its prospects of profit and profitability need to be bright. Else, the bruised blue chip will end up as a value trap. When it comes to valuation, over the last seven 10-year periods, at the low price, the average Price/Book of bruised blue chips is 1.5 times. Hence, on average, bruised blue chips should be bought only if valuation is attractive i.e. Price/Book around 2 times at best,” MOFSL said.
