“Revenue is a form of vanity, profit is a form of sanity, but cash is reality.” Someone has said it correctly, right?
– After all, no matter how good a business is, even if its sales are in lakhs or crores, there is no point in selling until the money i.e. cash does not come into the bank account of the company in exchange for those sales.
Now let’s assume that a company is making decent profits, and is also generating cash from its operations timely.
So now there are ways to use that cash. The company would pay taxes with that cash, reinvest some of the cash back into its business for working capital and inventory maintenance.
And with some money, the company can also do new capex, suppose they have to open a new plant.
So when we take all these components out of the company’s cash generated from operations,
and then at the end of the day, the cash that the company is left with is called the free cash flow, or FCF.
This is the amount that the company can use to pay off its creditors at the end or pay dividends to the investors.
FCF is an important metric for the long-term growth and stability of any company.
FCF tells investors how efficiently a company is using its capital to generate profits.
When a company’s free cash flow is compared to its earnings,
investors can also determine whether the company is generating enough cash to support its operations and invest in future growth opportunities.
So today we will tell you about 2 such high free cash flow generating stocks, which are trading at a discount from their 52W high.
We have also applied some quality filters before selecting these stocks such as.
Then we picked 2 stocks that are at the highest discount to 52W high.
Keep in mind, in today’s list, we have covered the second stock which is trading the most from its 52W high.
We took these numbers from the market closing of May 3, 2023, to calculate the percentage of both companies from their 52-week high.
So are you ready? Let’s start again with the first company.
The company is India’s largest and leading Active Pharmaceutical Ingredients ie APIs, Intermediates, and Nutraceutical Ingredients manufacturer.
The company offers high-quality products to its customers in 95+ countries.
They also created multi-bagger returns for its long-term investors.
The company, which generated a free cash flow of Rs 1,037 crore, is down by 28.92% from its 52-week high
they company has generated substantial wealth for its investors in the long term.
In fact, the company’s stock price has compounded by 20% over the past 10 years!
Yes, CAGR returns 20%! However, in the last 1 year, the company’s share price has fallen by about 28%.
But in the last 1 month, the company’s stock has also shown some recovery.
So what could be the reasons behind this sharp decline?
Let us know.
But first, let’s see what the company does.
Its business segments include the manufacture and supply of high-quality generics, custom synthesis of APIs and intermediates, and nutraceutical ingredients.
The company is not only in India, but it is the world’s largest API manufacturer.
Today, they have a team of around 16,500 people with a portfolio of around 160 products across various therapeutic areas. If we talk about the different business segments of the company, then the business of generic API comes first.
Within this category, the company manufactures 30 large-volume generic APIs, producing them annually with capacities ranging from 10 to 1,000 tonnes.
They export to 100+ countries.
In addition, the company has about 10 APIs in the R&D stages.
The second business segment is custom synthesis.
Custom Synthesis: Within this, Divi manufactures APIs and intermediates for global companies.
These products are used in a variety of medical fields.
Now what is the difference between this and the business of generic API?
In very simple language, generic API is used in the manufacture of those medicines which are off-patent.
That means now any Pharma company can produce it.
But custom synthesis is mainly done for innovator companies who have exclusive rights and patents to manufacture that drug for a specific time.
Generally, pricing power is more in this type of business, because there is no competitor in front, and due to this margins are very strong
Divi’s Laboratories has been affiliated with 12 of the world’s 20 major pharmaceutical companies for more than ten years.
And, the last business segment is Nutraceuticals.
Nutraceuticals: The company produces active ingredients and finished forms of carotenoids in Visakhapatnam.
Divi’s Laboratories now delivers carotenoids to nearly every major food, dietary supplement, and feed industry.
Nutraceuticals are nutrients derived from various food sources and provide additional health benefits to a human besides basic nutrition.
And speaking of Carotenoids, they are naturally occurring pigments found in plants, fruits, and vegetables.
They are responsible for the color of our food.
If we look at the revenue of the company, then the top 5 products of the company contribute as much as 60% of the revenue, and the top 5 customers contribute as much as 54% of the company’s revenue.
Geographically also if you look at the company’s revenue, most of the company’s revenue comes from North America and Europe.
In fact, if you look at the company’s margin too, there is a sharp decline from 44% in March 2022 to 24% in December 2022.
The management does not believe that margins are actually under pressure due to raw material pricing and energy cost.
The prices of some of the key materials used in their manufacturing process have increased by 30% to 50%.
In fact, some prices have shot up to almost 100%!
Apart from this, the company is facing another shortage on the logistics side.
Apart from the disruption in the supply chain caused by Covid-19, various kinds of problems are being seen in the global supply chain today.
Whether they are connected to the container, to transportation, or to the port for shipping.
Now for a company like Divi’s Laboratories whose 90% of revenue comes from exports, such logistical problems become a big challenge!
Another worth-monitoring aspect of Divi’s Labs is their working capital cycle.
The company’s working capital days were 177 in FY22 as against 152 days in FY21.
Working capital days shows the time taken by the company to convert its current assets into cash.
The lesser it is, the better it is considered.
The main reason for this longer working capital cycle at Divi’s Labs may be their extended inventory days.
So, the company follows a ‘campaign production’ strategy for its large volume of products like naproxen, dextromethorphan, and gabapentin.
This, the company manufactures these products in large quantities by running the plant at full capacity and stocks them for the future.
This strategy allows multi-purpose plants to be used for other products.
But because of this, they have to hold inventory for a long time, and their working capital days increase.
Let us now look at some key financial numbers of Divi’s Laboratories
and compare them with their listed peers- Granules India and Laurus Labs.
On the valuation front, Divi’s Labs is trading at a premium to Granules India and Laurus Labs.
At the same time, if you look at Debt to Equity, the ratio of Granules and Laurus Labs is around 0.40 to 0.41, whereas Divi’s Labs is debt free.
While Laurus Labs has the best sales growth among the three, Divi’s Labs is outperforming in terms of ROE.
Now let’s talk about today’s second company.
Do you know? Did you know that Aditya Birla Group had a refinery?
Aditya Birla Group and Hindustan Petrochemical Corporation Ltd, HPCL, jointly established a refinery and petrochemical facility in Mangalore.
Earlier in 2003, ONGC had done a stake buyout of Aditya Birla Group, after which it has now become the majority shareholder in this company.
MRPL, which operates in the trading business of aviation fuel and petroleum products through its retail outlets and transport terminals, has a crude oil processing and refining capacity of 15 million metric tonnes per annum (MMTPA).
The company, which generated a free cash flow of Rs 5,662 crore, is down by 49.67% from its 52-week high, due to a revision in windfall tax on locally produced and processed crude oil,
MRPL stock has given a strong performance on Dalal Street in the last 1 week where it is up nearly 14.5%
Now you will ask what is this windfall tax and what does it have to do with MRPL?
Well, in July last year, India started imposing a windfall tax on energy companies for the first time.
Windfall tax refers to the additional tax levied by the government on companies generating supernormal profits.
Now it is obvious that whenever additional tax will be imposed on the products of the company, then their business and profits will take a hit.
The government’s implementation of a windfall tax on refined crude products affected MRPL’s recent quarterly results. After a Q3 loss, MRPL shares have performed well, evident in their positive 1-year stock price movement.
Yes, MRPL has given negative 18% results in the last 1 year. Even the last 5 years’ stock performance has been disappointing for their shareholders. Now it is a matter of price movement.
Let us look a little deeper into the business of MRPL.
MRPL is playing a very important role in meeting the fuel demand of Karnataka today, as an oil refiner but also as a major retail player.
Yes, they sell their refined products through their strong distribution and retail network.
For your information, an oil refinery is a plant where crude oil or petroleum is converted into useful and high-value product gasoline, diesel fuel, fuel oil, heating oil, kerosene, liquefied petroleum gas and so forth
MRPL has started selling its refined fuel under the retail brand ‘HiQ’.
Very soon, MRPL is going to expand its presence in Kerala and Goa as well.
It also offers products like Bitumen, Furnace Oil, High-Speed Diesel, Xylol, Naphtha, Pet Coke, Sulphur, etc. on sale directly to its consumers.
Also, after the JV with Shell, MRPL is now entering into the sale of Aviation Turbine Fuel at Indian Airports.
And lastly, MRPL is also involved in the sale of a petrochemical called Polypropylene through its ‘Mangpol’ brand.
With 17.14 million metric tonnes, MRPL has achieved its highest-ever processing and production in FY23.
Also, they added 31 retail stores in the financial year, taking their total retail store count to 63.
Yes, we definitely saw the impact of the super high windfall tax in Q2 and Q3 of FY23, due to which their operating margins have come down.
However, after December 2022, the Indian government reduced the windfall tax significantly.
Between Jan to Feb’23, the windfall tax of Rs. 1900/tonne, and between Nov’22 and Dec’22 was a whopping Rs. 10,200/tonne!
MRPL’s QoQ revenue declined slightly, but their margin significantly improved due to lower windfall tax compared to Q3, resulting in their highest operating profit in the last 3 years.
However, despite considerable deleveraging in FY23, MRPL’s debt remains significantly higher than pre-pandemic levels, with a Debt to Equity ratio of 1.72 and a Current Ratio of 0.99.
Monitor their financial health closely. The current ratio tells us how capable the company is of meeting its short-term debt obligations, and should ideally be above 1.50. Talking about the shareholding pattern, the promoter entities still include big players like ONGC and HPCL.
ONGC and HPCL together hold an 88.58% stake in MRPL.
It has also sold its stake to the public in the last 2 quarters.
In December 2022 and March 2023, the public holding in the company has gone up to 10% plus.
On the other hand, holdings of both foreign and domestic institutions have come down. One more thing, there was news in January 2023 that ONGC has started the process of merging MRPL with HPCL.
MRPL enjoys a huge location advantage as it is close to Mangalore Port.
The logistical handling of its key raw materials such as raw and finished products for export is not only easy for them but also cost-effective for them.
But, being a PSU-controlled company as well as being in a commodity business comes with regulation and inherent cyclicality. MRPL’s business is highly vulnerable to international crude oil prices, import duties, and foreign exchange rates.
And due to this, the profit margin of the company never remains constant.
Let’s look at some key financial numbers of MRPL,
and compare it with their listed peers Chennai Petroleum Corporation Ltd and Indian Oil Corporation Ltd.
MRPL is trading at a P/E ratio of 4.2, at a much lower valuation than IOCL, but CPCL’s P/E of 1.2x is the lowest among the 3 companies.
In fact, the debt to Equity ratio of CPCL is also lower than that of MRPL and IOCL.But if we talk about Return on Equity and sales growth across five years, then CPCL is ahead of the other two companies.
The 3 companies have given negative returns to their shareholders not only in the last 1 year but also in the last 5-year period.
So here are 2 high FCF stocks which are trading at a huge discount from their 52-week high.
Which of these company stocks are in your portfolio?
Do you have any high free cash flow stocks in your eyes? Name it in the comment.
Let us remind you that these videos are for educational purposes only, and do not constitute any kind of buy or sell recommendation.
Do also read : Top Investing Opportunity in 2023