Aarvee Denims delivered a return of 47 percent in the past week alone after Porinju Veliyath bought 1.81 lakh shares of this not-so-well-known company.
When one of India’s most popular value investors invests in a stock, it expectedly hogs the limelight. Aarvee Denims made headlines as ace investor Porinju Veliyath reportedly picked up 1.81 lakh shares of this not-so-well-known company on September 1, 2017.
Since then, the stock had a stellar run with an upside of 47 percent in merely a span of a week. Should retail investors repose faith by blindly following the ace investor?
About the company
Aarvee Denims and Exports Ltd (ADEL) is engaged in the manufacturing and sale of denim and non-denim fabrics and garments. The company manufactures casual and winter apparel for men, women, and kids. De Extase, Fashion Wrapper, and Aden are its retail brands.
A glance at the company's financials over the years suggests that barring FY16 (a year in which the company reported a decent top-line growth), the numbers have been uninspiring when looked at from an overall perspective.
In comparison to its peers, ADEL’s revenue growth isn’t too impressive either, as seen in the exhibit below:-
From a segmental standpoint, ADEL’s turnover is dominated by fabric sales. Unless there is a material change in the revenue mix from commoditised fabric to value added variants in the coming years, the company’s fundamentals are unlikely to change significantly.
ADEL’s operating and bottom-line margins are amongst the lowest vis-à-vis its competitors.
Since ADEL has a leveraged balance sheet, its historical return ratios have been quite abysmal as well.
Therefore, except for the Porinju-triggered rally, the stock has been a consistent underperformer.
Is it the next Arvind in the making?
From the limited information shared publicly by ADEL, it is difficult to comment if the company has plans to shift its attention towards high-margin products in a bid to turn its financials dramatically going forward.
Even in seemingly attractive businesses, laggards will continue to struggle till there is a management change at the behest of a new equity investor, who picks up a substantial stake in the company. However, Porinju’s recent purchase constitutes less than 1 percent of ADEL’s share capital.
Therefore, investors should keep a close watch on ADEL's quarterly results to identify prospects of an operational turnaround, if any, before taking the plunge. Given the company's dismal track record since the past few years, it is best to avoid this stock for now.Moneycontrol Research Page.