Be light, get light oil : Bajaj Consumer Care

#Stock discussion

The market played to the rule book of being sideways the whole of April 2022 and we are back on the verge of making new lows now, thanks to the sudden rush by RBI to increase some of the vital rates in order to cover up scorching inflation.

Lately, as you all have been facing the trouble of finding new stocks to invest in, I realized that these are the times when contra bets have a high probability of success.

So based on my thesis, I have got a new stock for you this month. Let me cover the story first.

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What’s the thesis?

As you are aware, oil has been on the boil for the last two months and it has impacted economies worldwide, giving rise to unprecedented inflation and forcing central banks all over the world to tighten their policies.

But is it the end of the oil rise? let’s look at the oil price history of the last 30 years

By seeing this chart we may find that oil is already trading in the upper zone of its price, it has a direct correlation with economic growth and recession (as marked in grey).

But if I mix it with rising inflation and show you an inflation-adjusted chart for oil, you might have another thought.

One thing that is very clear is that oil cannot rise on its own until it is backed by strong economic growth. The supply shortage cannot be there forever since economies dependent on it will feel the heat, similarly higher oil prices are also not sustainable in the long run, especially in the current regime where there is so much focus on alternate energy.

The sustained higher oil prices may accelerate the alternative adoption and oil producers could find themselves in deep trouble. So higher oil prices are not in favor of producers as well.

This may seem counterintuitive but I feel there is a strong possibility of oil not going beyond 140 and a retracement might be near. Based on this thesis, I got this stock for you.

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What do they make?

1. This stock’s main product has raw materials dependent on oil (refined mustard as well as petroleum byproduct). Close to 38-40% of the cost is directly on petroleum by-products.

2. So the higher oil prices mean lower profit for this stock and consequently, its price is been trading at a multi-year low level.

3. The stock had an overhang of pledging and debts in past, but that has been resolved lately, albeit by promoters selling substantial holdings to repay the debt.

4. The promoters have been consistently trying to boost the company, visible from the change in management, hiring experienced folks from the industry, and supporting better practices.

5. Also, the company has been trying hard to break into newer segments lately and this augurs well for reducing its dependence on a single product.

6. Currently, 90% of its income, comes from one product.

Those are the important point to consider, now why do I feel that this company may be in for a turnaround?

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What’s the trigger?

1. The negativity of higher oil and dependence on a single product has been already priced in, so not expecting more than 20-25% of downside.

2. The oil is going to peak soon, reducing its cost and thus improving profitability.

3. Also, the stock pays a 5%+ dividend, which can potentially cap the downside.

4. The tougher market conditions have forced the company to lighten itself, like its product portfolio.

5. And the new management is not new to oil by-product industries.

Here is the 10-year chart of the stock, Bajaj consumer care.

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Risk:

As this is a pure contra bet, the chances of it getting backfire are more, but I am relying on the risk-reward proposition which is very compelling at the price range of Rs. 150-160.

Another factor that can derail the stock is the misadventure of its promoter by pledging or taking debt to safeguard other group companies, but in the current environment, it is less likely to happen, though we cannot ignore the possibility.

Though I have taken utmost care in getting the facts right, there may be some differences in it, it is always advisable to check in the facts before you decide to put in.

Also if you like the idea, please consider sharing it to increase the reach.