A Store Manager Guided Me to This Stock with 68% Upside - The 5 Minute WrapUp by Equitymaster
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A Store Manager Guided Me to This Stock with 68% Upside

May 25, 2018

Kunal Thanvi, Research analyst

Editor's note: Dear reader, taking advantage of the recent correction in the market we have recommended quite a few stocks. You can find the links to these recommendations in today's edition of The 5 Minute WrapUp.

Few months back, Sarvajeet and I were in Delhi for a company meeting.

After our meeting, we went to a mall to grab some food.

Since, our flight was delayed we had plenty of time to kill. We decided to do a bit of window shopping.

Window Shopping Helped Us Finding a Great Stock

We walked into store of a retail chain. It was a listed company and we had been tracking it for a while.

The management of the company had told us some interesting things.

But we were not convinced. We wanted to know the reality on the ground.

So, with some time to kill, we went in to investigate.

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The first thing we liked, when we entered the store, was the aura. The store was superbly managed with excellent interior decoration.

This was precisely the time when the Sherlock Holmes in me got interested.

The store manager greeted us and told us about some offers the company was running.

And one such offer was the customer loyalty program. Now, this was something the management of the company had already told us.

I was curious to know more. I wanted to understand how this program worked. The branch manager was kind enough to explain it to me clearly.

I enrolled myself in the loyalty program and then got talking with the manager.

We spoke for over an hour. Here's an excerpt...

  • Kunal - I really liked the interior. I have been to one of your stores in Mumbai, why there is a different interior for your stores across the country?

    Manager - Sir, in last one year, the company has changed interior for all our stores across the country. We have the same Indian Vintage interior in each of our stores.

    Kunal - Oh great to hear that. By the way what kind of response you have seen in the Loyalty Program? And how this is helping?

    Manager - Well, under the loyalty program we try to track the repeat customers. And under this program we got a very positive response with more than 60% repeat customers.

    In fact, this has given us the confidence of customer retention which gives us more incentives to spend more on marketing to create brand awareness.

    Kunal - Your brand is one of the few Indian Brand in segment you operate. How do you compete with global brands?

    Manager - Quality is one of the most important criteria in our industry. If our customers like a brand, they latch on to it, irrespective of its origin. However, we have successfully created Indian perception in mind of our customers. This is our differentiating point from other global competitors.

I learnt a lot first hand from this gentleman.

Many of my doubts about the company's strengths were cleared.

But the Sherlock Holmes in me is never fully satisfied...

So, after getting back to Mumbai, I went to a few more malls. I visited a more company outlets.

The staff at the stores confirmed what the management had said. The interiors across the country were changed and they are identical now.

I could easily figure out the subtle changes the company has made and implemented pan-India. All the stores I visited showed amazing repeat customer numbers.

The management's commentary about certain improvements were adding up.

Sarvajeet and I started working on this company closely. We compared its historical performance with global and local players. Trust me. It has outperformed them in terms of profitability.

We were also pleased to see that one of our super investors was continuously increasing stake in this company.

In fact, just the day before our recommendation, this super investor did a bulk deal to acquire even more shares. He now holds more than 5% stake in the company.

We recommended the company's stock yesterday. It scored 7 out of 10 on our Smart Money ScoreTM. We see an upside of about 68%.

It's safe to say, this is a high conviction stock pick. You can get the recommendation here.

A few other recommendations...

First, there's the stock in the energy sector Tanushree recommended just two days back. It's down about 20% in the last three months but has great prospects going ahead. The margin of safety is there...and the upside could be as high as 45% from these levels. You can get the recommendation here.

Then there are Tanushree's top three long-term recommendations. These are great stocks she has picked after cracking Warren Buffett's code for successful stock investing. In case you missed the report, here it is - 3 Stocks to Buy as per Buffett Code.

But that's not all...

Tanushree's publishing another stock recommendation later today! It's raining recommendations I tell you. This one is a true value stock that she is recommending to her premium StockSelect subscribers. If you're not a member of StockSelect, just click here and get access right away.

Chart of the Day

Talking about super investors, some of them are betting on the revival of the banking sector. With bad loans of around Rs 7.3 trillion, India's banking sector is going through a very rough phase.

The biggest losers have been public sector banks with a bad loan exposure of around Rs 6.1 trillion.

However, with the Insolvency and Bankruptcy Code (IBC), there is hope of some write backs. Last year, the RBI disclosed the top 12 loan defaulters accounting for around 25% of the total bad loans.

Bhushan Steel Resolved - A New Beginning for the Indian Economy?

As the chart shows, the biggest defaulter was Bhushan Steel with bad loans of Rs 559 billion.

However, there is some good news for the banking sector. Tata Steel has emerged as a buyer of Bhushan Steel under IBC.

It has agreed to pay around Rs 352 billion to Bhushan Steel's lenders for a stake of 72.6%. This implies a haircut of around 37% for banks.

We believe, this can be a big boon for the banking sector and the Indian economy. This is expected to bring consolidation across sectors with weaker players being acquired by larger players.

Further, this will also help banks recover their bad loans to an extent and hence bring back credit growth.

We strongly believe, this can be a solution to India's 'Twin Balance Sheet' problem.

We recently recommended a company to our Smart Money Secrets subscribers which is expected to benefit immensely from the Bhushan Steel's recovery.

You can get access to Smart Money Secrets here...

Kunal Thanvi
Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets

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