The Diwali Portfolio has generated an alpha of 15.3 percent in a little over fifty days (14.9 percent absolute return against minus 0.4 percent for Nifty). Such outperformance beckons continuous scrutiny to live up to the expectations of the investors.
In our Diwali portfolio, we are making a small change from Bhansali Engineering Polymers to another specialty chemical company – Vidhi Specialty Food Ingredients. The sharp run-up for Bhansali leaves little valuation comfort in the near term.
Vidhi Specialty Food Ingredients is one of two listed players in the food and beverage colour industry in India. In this oligopolistic industry wherein a few companies are up the scale in technical knowhow, quality control and regulatory requirements, Vidhi Specialty seems well placed to increase market share as it embarks upon capacity expansion in 2018. Based on more than doubling of capacity to ~9000 MT, and improved product mix, the management expects Rs 500 crore turnover in CY 2020.
We expect 27 percent CAGR in EBITDA for next four years based on topline growth and margin expansion of 210 bps (2017-21E). Stock is currently trading at a multiple of 15x 2020e earnings which is attractive in our view, given the significant barriers to entry and a secular demand visibility from the end market.
In case of Bhansali Engineering Polymers, we remain positive on the business which is well placed for market share gain in the ABS (Acrylonitrile butadiene styrene) plastics aided by fourfold increase in manufacturing capacity (by FY 2022). However, post significant run-up, we suggest to wait for a reasonable price level to consider a re-entry.
Table: Diwali portfolio stocks