This Stock Has Almost 50% Upside Thanks to GST! - The 5 Minute WrapUp by Equitymaster
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This Stock Has Almost 50% Upside Thanks to GST!

Mar 20, 2019

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

Did you remember the famous cliched line at the time of the GST rollout - 'Unorganised to Organised'?

Everyone was talking about it.

Newspapers. Research reports. Industry experts. Even company managements.

In fact, the company managements were gung-ho about GST.

But they got a shock when GST was implemented.

Companies that were paying 12-18% tax suddenly came into the 28% tax bracket.

What a nightmare!

During this period, due to high GST rates, the share of unorganised business increased.

Most of these companies were from the building material sector. This includes the likes of ceramics, tiles, plywood, and plastic products, etc.

There was an increase in unorganised trade post GST due to the free movement of goods and the lack of surveillance.

Listed companies are all in the 'organised' segment. Their business was badly affected that year.

Problems like the transition to GST, the delay in the implementation of the e-way bill, and higher taxes (under GST at 28%) were the main reasons.

However, the government closed the loopholes with the introduction of an e-way bill and other anti-tax evasion measures.

For these companies, the e-way bill, in particular, was the game changer.

It served two purposes in one go.

First, it helped in the movement of goods without hassles between the seller (consignor) and the buyer (consignee).

Second, it helped tax officers establish and account for the accuracy of shipments.

This also helped to detect and track of the movement of goods. It also made sure that the tax was being paid.

The government also lowered GST from 28% to 18% for some of these companies. Companies in the organised sector benefitted from this.

This is the story of this month's Smart Money Secrets stock recommendation.

Post the e-way bill implementation, this company is on a robust growth path.

This is especially true for its main business segment which accounts for about 70% of the company's revenue.

Robust Growth Post E-way Bill Implementation

FY16 FY17 FY18 9MFY19
Sales volume Growth (YoY) 5% 4% 2% 18%
Data Source: Company, Equitymaster

Interestingly, unorganised players account for 75% of market share in this segment. In fact, many unorganised players are approaching the company to become contract manufacturers.

Business is so good the company is now outsourcing production to cater to the rising demand.

Outsourcing serves three purposes.

First, the company can increase its sales volume without any capital expenditure.

Second, it helps capture market share from the unorganised segment.

And third, it leads to a higher return on capital (more about this in today's Chart of the Day).

The company was on our radar for quite some time. It passed the Smart Money ScoreTM with ease. Radhika and I were initially unsure about just how this 'unorganised to organised' theme would play out.

But now, we are seeing a very clear trend.

The high valuations of the stock was another reason for not recommending it earlier.

But the stock has corrected 55% from its highs. It's available at reasonable valuations now.

I believe, the potential upside in this stock is 47%.

We will publish the detailed recommendation report today.

If you've subscribed to Smart Money Secrets, you will receive my recommendation report in your inbox later today after market hours.

If you haven't subscribed to Smart Money Secrets yet, you can sign up here.

Chart of the Day

This month, we're recommending a company in Smart Money Secrets that is growing strongly with the help of outsourcing.

The outsourcing model has helped the company generate a higher return on capital employed (ROCE). ROCE ratio helps to measure the profit or return that a company earns from the capital employed.

Here are some interesting stats...

In FY14, outsourcing as a percentage of total sales volume was approximately 26%.

By FY18, it had grown to around 33%.

ROCE on the Rise Due to Increasing Outsourcing

Outsourcing frees up the company's existing capacity. This can be utilised for making premium products that have higher margins.

Similarly, outsourcing helps the company to target the lower-end market with the outsourced products.

Importantly, the increasing proportion of outsourcing volume implies a shift from the unorganised to organised segment.

This month's Smart Money Secrets recommendation is a real beneficiary of this shift.

I believe, the potential upside in this stock is 47%.

If you're a Smart Money Secrets subscriber, check your inbox later today for the detailed recommendation report.

If you haven't subscribed to Smart Money Secrets, you can get the report by signing up here.

Regards,
Sarvajeet Bodas
Sarvajeet Bodas
Co-editor and Research Analyst, Smart Money Secrets

PS: Sarvajeet and Radhika have published their latest recommendation report. Get the report by signing up for Smart Money Secrets here.

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