Over the last 6 months shares of Arvind Mills have almost doubled whereas the stock price of another textile leader Raymond has barely inched up by 30%.
Raymond is an iconic brand with dominant market share and an impregnable consumer franchise. Raymond also owns all its brands.
On the contrary, Arvind is more of B2B business. Its branded foray is essentially JVs or in-licensing arrangement with foreign brands.
Intuitively, we all know that Raymond has a superior franchise, sticky channel and stronger distribution, its a focused and stable business model. But the share price over the last six month of the 2 stocks have just defied this logic.
The main reason behind such a strong move in Arvind's share price is essentially a clear communication by the company management about the growth and improved profitability.
In various communications which are available on the company website the company targets to triple its topline to Rs.18000crs by FY18 which implies roughly 30% annual cagr.
At the same time, company also talks about the margin expansion and desire to improve RoCE to 20% plus.
Its but natural that such projections make the stock look quite cheap at current prices and hence the heady run up in the stock.
However this reminds me of a very interesting thought put forth by a leading value investor. He said, "P&L investing often goes wrong as the business environment is so volatile today; projections turn out to be way below expectations. However, instead of earnings we focus on balance sheet buying 30 cents in a dollar at bottom of the cycle; asset values don't change as drastically and often increase with inflation."
Taking a clue from this legend, I though lets evaluate the two businesses as these are today. The analysis lends necessary support to the intuitive disconnect that Raymond despite being a stronger and consumer facing franchise is not so recognized by the market.
The analysis throws that Raymond is not only deeply undervalued relative to Arvind but its a revelation for value investors eyes as the core business is essentially available free. And given the Raymond management has gone on record with its intent to unlock the value in immovable property its a matter of time that the stock will have a 'catalyst' in place.
Arvind shareholders will definitely make money if management does achieve what its targeting, but the journey is one up hill and a mammoth task. For investors margin of safety is very low.
Raymond on the other hand is subject to same set of macro environment with each of its textile businesses as Arvind is - its branded textile fabric, B2B denim and branded apparel business franchise are superior to Arvind growing at similar pace. But the stock offers great margin of safety as the core business is available essentially free when one builds in value of hidden assets which offers very high margin of safety to investors.
No points guessing which stock one should load up.
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