2 Turnaround Stocks That Can Re Rate in 2023 

Hi guys, this is Aditya Vora here.

Over the weekend I ran a screener with the intent to find turnaround stocks.

The thing with turnaround stocks is that it is like a double-edged sword.

For your investment in turnaround stocks to click, 2 conditions should satisfy.

1 is that the turnaround should be sustainable, it should not be a one or two quarter thing.

And secondly, if everyone is expecting a turnaround or if everyone is talking about the bottom in the turnaround stock then No point chasing such stocks.

While my filter gave me more than 100 stocks, I have shortlisted 2 stocks which I believe can be good turnaround candidates.

Also please note, I have analysed one stock on fundamentals and the other stock purely on numbers without focusing on fundamentals.

So, guys, the first turnaround stock is Thomas Cook India.

Now Thomas Cook is a Solid brand, a solid company but unfortunately was the biggest casualty of covid as travel and especially international travel ceased.

A lot of us will associate Thomas Cook as the tours and travel player, however let me tell you there is much more to it.

As you can see in the slide, Thomas Cook has 4 streams of revenues.

Not only does it offer travel services, but also issues forex cards and remittance facilities.

Thomas cook India also has a leisure resort under the famous brand of sterling holidays.

Apart from this, it also gets a decent size of its revenues from a subsidiary digiphoto entertainment imaging Ltd which clicks and process photos and videos of visitors at tourist attractions.

So, the next time when you sit in a ride at Universal studios, it is Thomas Cook India's company clicking your photographs.

Let me briefly talk about the turnaround in Thomas Cook at the consolidated level.

If you look at the slide, what a remarkable turnaround the company has had over the past 3-4 quarters.

And mind you this is despite international travel not having resumed fully as China was a problem point till last quarter while Russia still remains a problem.

Before I talk individual segments, Let us talk about how demand is currently in different segments.

In the slide, as you can see, most of the segments have recovered as compared to Covid. Some segments like leisure hospitality and digital imaging solutions segments are way above the pre covid run rate.

Most segments have reached 85-90% of pre covid levels.

In my view, in the coming quarter, which is the peak travel quarter for India, the forex and travel services will cross the pre pandemic levels.

Let us look at the revenue share of each segment.

The travel and related service is the core business of the company, accounting for 75% of total revenues.

This is the bread and butter of the company.

Another important and lesser-known segment is the digital photo processing segment which accounts for about 15% followed by forex and sterling holidays in single digits.

Let us, focus on 2 main segments which is the travel and digital photo which accounted for about 90% of revenues for Thomas Cook India as on December 2022.

The travel and related services have corporate travel, domestic and international holidays and meeting and conference travel.

If you look at recovery, the strongest has been corporate travel where the margins are the highest while domestic holidays have recovered roughly to 90%.

I believe the growth trigger for the next few quarters is likely to be international holidays, which has recovered only 60% from the pre covid December quarter.

The management expects this to touch 95% recovery in the fourth quarter of FY23 and go past above 100% as international travel continues to pick up.

The reason why international travel was down was on account of hassle for covid testing and restrictions in many countries. Another reason is the delay in getting a visa for many European countries and USA.

I believe all of this is behind us now and international revenues should see a jump with peak travel season in this and the next quarter.

The next important segment is the digital photography segment.

You name the attraction and tourist destination, and Digi Entertainment, Thomas Cooks subsidiary will have a tie up to click and process your photos.

It has a global presence in 19 countries.

Whether you are at universal studios or at a casino in Venetian at Macau or inside Burj Khalifa, the tallest building in the world- Digi Entertainment is a part of it.

The growth is directly proportional to international travel.

That's where the pricing power is...

Look at how this segment is showing a turnaround.

Also, the company generates a Pre tax margin of roughly 7-9% from this segment.

Lets talk about the other 2 segments which have a lower contribution with respect to sales but have high contribution to profitability.

Basically, high ROCE business where capital contribution in limited.

The forex segment contributes to only 5-7% of sales for the company, as stated earlier, it is very important from the margin and profitability point of view.

A mere 5-7% revenue contribution accounts for 20-25% of the company's earnings before tax.

Forex business generates an EBIT margin of 25% on an average which is expected to go higher as volumes pick up.

There are 2 triggers for this, one is more number of people travel and thus more forex cards get sold giving it volume growth and another important factor is when people spend more money abroad, they load a higher amount in the card.

You will be pleasantly surprised with the growth in forex cards business.

New cards issued have gone up 72% during the December quarter as compared to the previous quarter. While I agree there is some seasonality as people travel more in December, but the trend is encouraging.

Another factor is that the card loads amount is 1.8 times higher than last year in the December 22 quarter.

Forex business is like cross selling as the travel agents already use Thomas cook services.

It is a capital light and technology focussed business.

I believe, as international travel picks up with penetration of cards going up, the sky is the limit for this segment.

In fact, most of the leading banks have a tie up with Thomas Cook when they issue a forex card.

And lastly sterling holidays which accounted for 7-8% of revenues too generated 25-28% of earnings before tax. That's an EBIT margin of 20-25% on an average.

My point is that the current pain point which is the core business travel and services has turnaround from deep loses to lower single digit margins.

Going forward, as international travel picks up, the profitability is likely to improve drastically.

This will bring the ROCE and ROE of the company much higher.

If you look at the valuations, the stock is available at a 1.6 times price to book value.

Going forward when numbers continue to improve, I am sure the forward 1 year price to book will be at 1 or 1.2 times.

And mind you as on December 22, the company has a cash of Rs 10 and a half billion and borrowings of roughly rupees 6-7 billion. It is net cash positive.

If you look at the past, there is no way you can touch the company, because of the legacy issues and pathetic financials.

However, the turnaround has happened since the past 2-3 quarters.

While major reopening trades have tripled from the bottom, this stock has hardly doubled.

Also, this company is owned by Canadian investor Prem Watsas Fairfax group which owns 72.3% of the company. While the UK based Thomas Cook closed, the promoters of the Indian entity acquired the brand rights for Rs 14 crore, enabling to use the brand of Thomas Cook in India.

So friends that was Thomas Cook for you...

Now let me shift focus to a stock which came on my screener purely on improving numbers and extremely cheap valuations.

I haven't seen such cheap valuation in a decent company since a very long time.

The stock I am talking about is Dishman Carbogenics Limited.

Dishman is engaged is a pharma company and is engaged in contract research and manufacturing services popularly known as CRAMS.

The CRAMS vertical accounts for roughly 75-80% of revenues while 80% of the CRAMS revenue is earned by the company from Switzerland, France and China.

The other segment is the Molecules vertical.

This segment comprises multiple subcategories such as Specialty Chemicals, Vitamins and Analogues, Disinfectants, and Generic APIs.

Carbogen Amcis BV contributes ~62% of Molecules Revenue vertical.

Lets look at the numbers and stock price performance.

The company was doing fairly ok till FY20, with decent revenues, operating margins, and profits.

However, FY21 resulted in a net loss with operating margins taking a hit.

Lets, look at it from the quarterly run rate perspective.

The company registered good numbers for the December 22 quarter. Also if you see the trend, there can be improvement seen in revenues and operating profit in June and September quarters too.

While it is very difficult to predict the future, let us assume that the quarterly performance if not improves, at least remains steady going forward.

With that assumption, the highlight is the valuation at which this stock is available.

You are getting Dishman at a price to book of 0.4 times and that too with such pathetic performance in numbers.

Imagine how much the stock will re rate if and once the numbers improve.

You are getting something at dirt cheap valuations.

Also do note, that the analysis on Dishman is purely on numbers and I have not analysed the business.

So friends, that was Thomas Cook and Dishman for you.

2 turnaround stocks I am betting on.