»5 Minute Wrap Up by Equitymaster

On This Day - 18 SEPTEMBER 2019
How Rahul Shah Helped Me Recommend Hindalco Which Doubled in Six Months

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

Yesterday was carnage on Dalal Street.

The market tumbled sharply and registered one of the biggest single-day declines of 2019.

Mainly, a sharp surge in crude oil prices was the culprit.

You see, attack on two Saudi oil facilities reduced the kingdom's output. In the near-term, this could create a global demand-supply imbalance.

Talking about the demand-supply imbalance, I remember the late 2015 period...

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This was the time when the commodity market was facing one of its worst runs in recent times.

At that point, metal and commodity companies were bleeding. The sector was contending with the lowest prices since the financial crisis.

A combination of oversupply and weak demand wreaked havoc on the natural resources industry. During this time, no one was looking at metal companies.

When we met the management of Hindalco Industries towards the end of 2015, they were surprised.

'No one is meeting us right now. Why do you want to meet at this time?', asked the management at the start of the meeting.

'No one is looking at this stock that's why we want to look at this', came the reply from Rahul Shah who accompanied me for the meeting.

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You see, Hindalco faced numerous issues back then.

Hindalco's coal mine was de-allocated by the Supreme Court's verdict. The company also lost access to its Talabira-I captive coal block. This led to supply-side disruption and an increased cost of production.

The bad news didn't end there. Since November 2014, aluminium prices crashed more than 30%.

No wonder the stock had fallen by around 60%.

But why did we choose Hindalco despite several other options at our disposal?

Rahul's logic was simple and straight forward.

  1. Go with the market leader - Hindalco is the biggest integrated Aluminum producer in India.
  2. Go with a player with the largest value-added products (VAP) - Again, Hindalco was the leader. VAP helped the company achieve better realisations than its competitors.
  3. Attractive valuations - The stock was trading at multi-year lows despite being a market leader.
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The first two points offered limited downside and low valuations presented a huge upside potential.

I remember Rahul clearly said, 'It's very difficult to predict the bottom of the commodity cycle, but try to connect the dots. I see a clear winner'.

When we discussed Hindalco later, Rahul asked me some pertinent questions, 'Is it feasible when your cost of production is above your selling price? How long will this continue?'

In those days, global players were either shutting down their plants or reducing production. So, the supply-side problem was getting addressed.

But another important issue came up at the time of the recommendation: A low Equitymaster Risk Matrix (ERMTM ) score.

You see, the company fared poorly on some of the factors such as regulatory and cyclicality risk, interest coverage ratio etc.

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Again, Rahul came to the rescue.

  • Hindalco will score lower than any safe blue chip. But considering the limited downside (due to market leadership) and huge upside potential, we could consider it. We have a good thesis.

That's why I recommended Hindalco in February 2016 at its lowest historical valuations.

Within six months, we successfully closed the position with 116% returns. The stock had more than doubled in less than six months.

It's easy for me to write about big winners like Hindalco but I give credit to Rahul. He taught me to think from a contrarian perspective.

Rahul aptly quotes Whitney Tilson, an American investor and former hedge fund manager when we talk about the contrarian approach.

  • To succeed as a contrarian, you must recognize what the crowd believes, have concrete justification for why the majority is wrong, and have the patience and conviction to stick with what is, by definition, an unpopular bet.

Rahul's counterintuitive approach to look at things clearly is what differentiates him.

In office, Rahul is constantly at work developing new strategies to improve performance with minimum risk.

And I believe he has come up with an exciting new system - Automatic Income.

Basically, Rahul has developed a new system which can potentially increase your monthly income, even double it, in the long run.

He published his first free video about the Automatic Income strategy yesterday.

You can find the details here.

And three cheers to the contrarian approach of investing!

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

PS: Yesterday, Rahul Shah went live with his first Automatic Income training video for those looking to double their income. You can access the video here.

PPS: Radhika and I published a premium report on our top 5 stock recommendations. If you haven't subscribed to Smart Money Secrets yet...you can do so here.

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