»Profit Hunter by Equitymaster

On This Day - 12 MARCH 2019
A Rare Case Where 'Value Migration' Meets the Right Price

Richa Agarwal, Research analyst

I have never been a big fan of theme based investing or big ideas.

While they may have some merit, such stocks are often highly chased, leaving little margin of safety for investors.

The price is almost never right.

But thanks to the smallcap correction, finding that sweet spot is not difficult anymore.

One of my favourite themes is Value Migration.

Now Value Migration is an often-misunderstood concept in investing.

Take the instance of so called value migration in transport.

One may argue that value has migrated from railways to low cost airlines. While there is a significant shift in the travelling trend in favour of low cost airlines, I wonder if I could say the same for value. Most of these low cost airlines are still struggling for profitability.

Similarly, I feel quite sceptical when one cites value migration in shopping from brick and mortar retail model to ecommerce companies.

Think of DMart versus Flipkart. I still like the former - a traditional business model with clear path to profitability.

Coming to a value migration play that I find interesting...

This company has been doing several things right. It started by migrating up the value chain by shifting from a raw material supplier to final product manufacturer- a shift from business to business (B2B) to business to customer (B2C) model.

That itself has led to an 8% increase in margins over last few years.

The backward integration helped the company become the largest niche player in its segment.

Real value was created in the form of a formidable brand that allows the company to collect cash before making sales.

And the management is no mood to rest on their laurels.

They have their eyes set on the next step of value migration - shifting to a market where the margins are higher and the opportunity size is bigger.

There are multiple tailwinds to support that shift - focus on affordable housing being one of them.

Most importantly, the company has the balance sheet and the kind of management that will be crucial to this transition.

While I have always liked this company, it is only over last few months that a real buying opportunity has emerged.

It's my latest recommendation in Hidden Treasure.

So make the most of such value migration bets when they are available in the buy zone.

But do not forget to double check if it is just a short term trend or real value that you are betting on. The two could be surprisingly different.

Regards,

Richa Agarwal
Richa Agarwal (Research Analyst)
Editor, Hidden Treasure

PS: Small cap stocks have started to rally. Our small cap expert Richa Agarwal believes this is the time to buy before they run up. Get Richa's best small cap stocks now.

PPS: Our technical analysis expert, Apurva Sheth, has just published 2 exciting trading calls for his Profit Hunter Pro subscribers to take advantage of the Nifty breakout. You can get Apurva's trading calls by signing up for Profit Hunter Pro here.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407