“Typically, turnaround companies are led by a change in management or change in business cycle. Had companies been impaired severely due to demonetisation in Q3 FY17, then March quarter could have been seen as a quarter to reckon with for turnarounds. IT, Pharma may slowly get into value zone,” Shashank Khade, Director and Chief Equity Advisor at Entrust Family Office Investment Advisors told Moneycontrol.
“Any minor incremental turnaround in such sectors in the coming quarters could re-rate the entire sector. Unorganised to Organised demand swing post-GST could lead to a positive surprise in many companies in FY19 and beyond,” he said.
He further added that CY16 was a year of turnarounds in commodity stocks which had plummeted severely in CY15. There is a need to search for potential turnarounds in other sectors.
How to spot a turnaround company?
It is worth investing in a turnaround company but the hard part is to spot one. Financial performance is one indicator but seasoned investors make money if they are able to buy the stock at lower valuations.
“Spotting a turnaround at the right time is important. Otherwise, one may enter at a very late stage and the returns may not be extraordinary. On the other hand, too early an entry could also mean that the turnaround may not happen or may fail,” Deepak Jasani, Head - Retail Research, HDFC securities told Moneycontrol.
“Hence, investing in such stocks needs acumen and experience of reading/knowing about past turnaround companies and how those companies overcame the hurdles in their way. The risk involved in this activity is more than adequately rewarded if proper due diligence is done by the investor beforehand,” he said.
Investors must lookout for such companies in the March quarter and there will be plenty. Leverage is an important component in company’s balance sheet. On one hand, it let the company increase its production but too much of debt strain the finances of the company.
Fortunately, at a time when costs are rising across the world, India could witness fall in interest rates which could help companies pay off their debt as well as expand capex plans.
“We feel many companies would be able to pay-off their debts in low-interest rate regime. We also feel the commodity cycle has bottomed out, and demonitisation has given an edge to the organized sector over the unorganised sector,” said Goel of Bonanza Portfolio Ltd.
A fall in crude prices and starting of government capex will give opportunities to the listed companies to generate revenue, said Goel. The quote “Turnarounds seldom turn” can be hold wrong and if investors can grab the opportunity then turnarounds do turn! he explains.
It is worth investing in turnaround companies, but there is an element of risk because turnaround can take much longer than anticipated. Such stocks could languish and correct beyond expected worst case scenarios.
“The trigger for turnaround needs to be identified well by investors. A company with weakening fundamentals could get worse before it gets better. Needless to say, it is darkest before dawn,” explains Khade.
“In such situations, disbelief in investors about these companies is at its peak. Hence such investments could take longer to render returns, which is a potential opportunity cost,” he said.