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We have an addition to the CAPM Portfolio in the name of a stock that has taken an absolute drubbing.
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Last year, Gitanjali Gems crashed from the Rs. 600 levels (in May 2013) to Rs. 60 with a short span. The massive fall was after the RBI restraint on Gold imports which really hurt their business. Sales in the December quarter were down over 36%, and the EPS (trailing 12 months) fell by nearly 60%!
But there’s been a development on Wednesday that you must know about.
RBI Eases Gold Restrictions
The RBI has eased gold import curbs, looking at the strong rupee (due to foreign investor inflows). The fall in the rupee was one of the reasons to curb gold imports in the first place.
In their notification, they have re-allowed bank credit to gold jewellers. This was earlier banned and jewellers had to put up the full cash before import was allowed. The ban was effective from Jun 2013, which coincides with the massive fall in Gitanjali’s shares.
Credit can be given by banks that had earlier given such credit to jewellers, upto 80% of what they had lent out in March 2013. This doesn’t mean you and I can borrow to buy gold, but it means companies like Gitanjali can.
We had written in Capital Mind when the shares were falling, that the share was showingtechnical weakness even before the massive fall. It just fell from then, circuit down every single day until it reached the Rs. 56 level.
Today the price is showing the reverse. It’s just broken out of the intermediate trading range it had formed:
Note the two big closes in the last two days. And the timing of the RBI announcement (May 21). Obviously, someone knew. And India’s full of insider trading. But we digress.
Will Gitanjali stop here?
It shouldn’t, looking at the fundamentals. With the company showing a trailing EPS of Rs. 26 inspite of these curbs, it’s not in really bad shape. If anything profits should go up, and that means the current P/E of less than 4 should look really attractive. (Even after a 30% jump in two days).
A large number of Gitanjali’s shares were invoked as part of their pledges last year, and contributed to the fall. The promoter’s shareholding fell from 55% to 38%. The company went from having a market cap of 5,000 cr. to what is now less than 1,000 cr. Even today, 1/5th of the promoter holdings remain pledged, but that’s no longer as significant.
The promoters will look to buy and increase their shareholding. The fact that their pledges were invoked indicate that lenders bought shares from the promoters and possibly dumped them in the market. The debt burden, though, remains high and the company’s marked SMA-2 (Special Mention Account, overdue 60 days) and is looking for another loan of 1700 cr. Given the changed circumstances, they might just get it.
Further, the new government might reduce gold restrictions some more (Reuters) and it would make complete sense to do so in the face of massive smuggling going on. There is already a plan in place to cut restrictions. Reduced duties would curb smuggling, and would help players like Gitanjali source gold at lower prices.
What took the stock down was the RBI resistance to credit against gold. Now that the restrictions are going away, it’s time to consider the stock again. And the technicals show a great breaking out - if history’s anything to go by, even half of the previous high of Rs. 600+ will mean a 3x return on the stock purchase.
We’re adding the stock to our portfolio at 91.2, and we hope you’ll be able to see a similar price when the market opens tomorrow. We’re ruthless about stop losses, but since the stock’s so volatile we may need to keep a 20% SL initially. We’ll tighten as the stock reduces its fluctuations.
Here’s the portfolio so far:
The XIRR based returns on exposure show us a phenomenal 110% annualized. We’re so scared of such large figures that we won’t show off, but we also know that we just did. But please don’t expect anything of this sort going forward.
Note: We’re long these stocks. It’s in our bias to talk them up. So please don’t consider this investment advice and do your own research before investing. And please don’t ignore your stop losses.
Another Note: While we have Kalindee Rail in our portfolio, it’s up more than 30% from our purchase price and has been at upper circuits since (other than for a few hours on Wednesday). So we’re not showing that stock in the portfolio above.
Disclaimer
Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.
Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.
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