Cravatex Ltd, a micro-cap company with intriguing investment potential, has caught the attention of Ashish Chug, a professional multi-cap investor. Chug has in the past invested in several micro-cap names that have gone on to deliver good returns. What exactly allured him towards Cravatex? Moneycontrol spoke to Chug to understand the investment case.
This company, composed of two subsidiaries — one in the UK and another in India — embarked on a clean-up as it was reeling under losses till a year ago.
The main drag on the portfolio that was causing strain was the India subsidiary. So the company decided to sell the business to Metro Brands in October, 2022 for Rs 202 crore. This strategic move has proven instrumental in cleansing Cravatex's balance sheet, rendering the company debt-free. "This turnaround has been truly remarkable, with a clean balance sheet and a substantial cash reserve. Now, Cravatex appears poised for a fresh chapter of growth," says Chug.
Healthy financials
The company’s debt that stood at Rs 88 crore in FY22 is now down to 0. Its negative reserves to the tune of Rs 52 crore is gone. Now, reserves stand at Rs 90 crore. Other liabilities are also down from Rs 327 crore to Rs 44 crore. The cash pile itself is about Rs 56 crore. Financially, the company is now on firm footing.
Also read: Cravatex zooms over 30% in 2 days as Ashish Chugh picks stake
But that apart, what attracted Chug towards Cravatex was the company’s compelling property portfolio in two coveted locations in Mumbai; Nariman Point and Prabhadevi. Previously mortgaged to HDFC Bank, these properties have been released, opening doors to opportunities for future growth and lucrative rental income. The fair market value of the two valuable properties amounts to Rs 62 crore. "Cravatex's rental income from these prestigious properties alone is projected to reach Rs 2.5 to 3 crore, making it an attractive prospect," says Chug.
The fact that the company boasts of cash and property in excess of Rs 100 crore while the market-cap of the company is only Rs 80 crore makes for a strong investment case based purely on asset value.
But that is not all. The other important piece is Cravatex’s UK business called BB UK. According to Chug, this is seeing a temporary dip in turnover, currently averaging around Rs 350-400 crore. At the peak, the UK subsidiary was clocking a turnover of Rs 700 crore per annum and was profit-making, unlike the Indian subsidiary. “The current blip in turnover is because of recession in the UK and once business looks up there, they should be able to gain back share,” says Chug.
“If and when the company starts seeing a revival in its UK business, you won't find this stock at the price you see today,” Chug added.
Investment strategy
The risk Chug emphasises with regards to the purchase is that the micro-caps lack liquidity and therefore the impact cost of buying and selling stocks is high, which eats into returns. “In this case, there was a ready seller and I could buy the entire lot without any escalation in the price.”
When it comes to investment strategy, Chug identifies himself as a value investor. “My thesis is, heads you win, tails you don’t lose anything. I have no clue how the company will perform in future. If the company doesn’t perform in future, I won’t lose anything. But the fact is, the recession factor is already built into the price, so if the situation improves, and the company takes new initiatives to grow the business, then I may make a lot of money.”
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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