My First Mistake!

 

I started my Investing Journey in 2018, wherein I started following the procedure that I have been mentioning in my Old Posts (The Equity Checklist). I was focusing mainly on Small-Cap Stocks. I wanted to look at a sector which I understood so I picked up the FMCG sector.

In the FMCG sector, my attention went to towards a stock called Bajaj Consumer Care. They are engaged in the business of cosmetics, toiletries and other personal care products. The Company has presence in both domestic and international markets. They are mainly into Hair Care and Skin Care. They have 15 brands and more than 100 SKUs.

My Thesis for the company was as follows:

-          P/E: 30 (Quite reasonable considering I was an amateur in the research segment)

-          Revenue Growth: Grew from 468 cr. in FY12 to 868 cr. in FY18 giving a 76% jump in just 6 years.

-          PAT Growth: Almost Doubled from 120 cr. in FY12 to 211 cr. in FY18 in just 6 years.

-          Debt: The D/E ratio usually was around 0 during those years.

-          Margins: EBITDA Margins in the range of 30-40%. PAT margins in the range of 20-30%.

-          Working Capital days: Remained Negative.

-          ROE/ROCE: In the range of 40%-50%.

-          Promoter Shareholding: 66%

The price at that time was around 480 with a P/E of 30. The company looked good to me fundamentally (considering that I was amateur at that time), I kept it in my watch list.

I started the buying the stock in Feb, 2019 around the levels of 350. I averaged the stock downards quite a few times until 170. I finally exited the whole stock at around 200 with a total loss of 9.2% of my investment in July, 2021. If I would have kept my holding until today (Rs. 161 in March, 2023) then I would be at a loss of 43% and at 52 week low of Rs. 125, my loss would be around 54%.

I was very grateful that I exited the stock when I did, because since then the price started correcting. There were various reasons that the price today is Rs. 160 which I had completely ignored in my original thesis and went completely out of my focus.

-          Segment/Competition: They were operating in a very niche segment. They were focusing on both rural & urban through different SKUs. Rural was a better market for them than urban. But even through these different marketing activities and different SKUs for rural & urban, they weren’t able to convert them into revenue. Plus there was competition from new brands like Mamaearth (established in 2016) & Tru Hair (established in 2019). Mamaearth and Tru Hair were providing products which were different from their usual products in Skin Care and Hair Care segment. Both these brands were providing products in the premium segment catering to urban consumers which would have given them the flexibility of pricing their products on the higher side. I am guessing the same couldn’t be done by Bajaj Consumer.

-          Revenue Trend: Started to stabilize since FY19 in the range of 800-900 crores.

-          PAT Trend: Started to stabilise around 200 crores.

-          ROE/ROCE Trend: Remained in the range of 20-30% after FY19.  

-          EBITDA Margin Trend: Remained in the range of 20-30% after FY19.

-          PAT Margin Trend: Remained in the range of 10-20% after FY19.

-          Promoter Stake Sale: The promoter sold stake of 22% in October, 2019 wherein their shareholding reduced from 66% to 38% and has been at the same level since then. They sold the stake to remove the pledge and reduce debt. When I was looking at the company in 2018, I guess it was my mistake that I completely ignored the part where the promoter had pledged the stock (60% pledging is a huge red flag). This was a good learning from this company. Its market capitalisation (m-cap) fell to Rs 2,885 crore from the m-cap of Rs 5,415 crore as of January 1, 2019.

Overall, the performance and the stake sale was the reason why this stock started to correct and isn’t able to give returns to a long term fundamental investor. I am glad I corrected my mistake when I did. I don’t think I will be adding this stock back to my watch list anytime soon.

Hope my learnings from this mistake will also help other fellow investors!!!!

Happy Investing!!!