Author: TSX Stocks

At the close in Toronto, the S&P/TSX Composite lost 0.47%.

The best performers of the session on the S&P/TSX Composite were Mattr Corp (TSX:MATR), which rose 15.97% or 2.09 points to trade at 15.18 at the close. Meanwhile, Superior Plus Corp (TSX:SPB) added 14.64% or 0.82 points to end at 6.42 and NuVista Energy Ltd . (TSX:NVA) was up 8.46% or 0.99 points to 12.69 in late trade.

The worst performers of the session were Sandstorm Gold Ltd . (TSX:SSL), which fell 8.55% or 0.75 points to trade at 8.02 at the close. First Quantum Minerals Ltd . (TSX:FM) declined 7.91% or 1.62 points to end at 18.87 and Ivanhoe Mines Ltd. (TSX:IVN) was down 7.22% or 1.44 points to 18.51.

Falling stocks outnumbered advancing ones on the Toronto Stock Exchange by 536 to 361 and 102 ended unchanged.

The S&P/TSX 60 VIX, which measures the implied volatility of S&P/TSX Composite options, was up 2.30% to 11.57.

Gold Futures for December delivery was down 0.39% or 10.50 to $2,695.30 a troy ounce. Elsewhere in commodities trading, Crude oil for delivery in December fell 2.50% or 1.81 to hit $70.55 a barrel, while the January Brent oil contract fell 2.08% or 1.57 to trade at $74.06 a barrel.

CAD/USD was unchanged 0.37% to 0.72, while CAD/EUR unchanged 0.45% to 0.67.

The US Dollar Index Futures was up 0.49% at 104.89.

Are federally insured banks warming up to the cannabis industry? 

A recent deal announced by a major cannabis company based in Connecticut could indicate the answer is yes.

Stamford-based Curaleaf Holdings Inc., the world’s largest publicly traded cannabis company, announced this week that it has secured a new $40 million revolving credit facility with a major commercial regional bank. 

Curaleaf, which operates four dispensaries and cultivation facility in the state and has other operations in the U.S. and internationally, said it will be able to draw down on the credit line “as needed for general corporate purposes and working capital needs.”

The company declined to name the bank involved in the deal, but Chairman and CEO Boris Jordan called the financing arrangement a “milestone event for Curaleaf.”
He said the “credit line provides flexibility traditionally not available to the cannabis sector, and allows us to continue growing Curaleaf as the leader of the global cannabis industry during what continues to be a difficult capital raising environment.”

Banks and credit unions have been skittish about serving the marijuana industry because cannabis remains illegal at the federal level. In short, because marijuana is still a Schedule 1 drug at the federal level, it is illegal for banks and credit unions to lend to such companies. 

However, some financial institutions have quietly dipped their toes in the market by offering cannabis customers cash management services like accounts and deposits.

The Drug Enforcement Agency, at the urging of the Biden administration, is in the process of potentially reclassifying marijuana as a Schedule III drug, which would ease restrictions on cannabis use. But it’s not clear what impact that would have on bank financing for the industry. 

Curaleaf, which trades on the Toronto Stock Exchange, earlier this year identified Stamford as its new headquarters. 

The company operates in 17 states and had 19 cultivation sites and 147 retail locations in the U.S. as of August. 
 

While the exact rationale behind their moves is known only to them, such exits can sometimes serve as a red flag for other investors, prompting a closer look. These strategic sell-offs, often made well before broader market sentiment shifts, may hint at underlying changes in company fundamentals or sector dynamics that others have yet to notice.

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Here are five stocks that these “Warren Buffetts of India” have trimmed from their portfolios, based on filings for the September quarter (note: filings only reflect holdings above 1% of a company). It’s worth noting these aren’t panic-driven sales, but deliberate decisions by investors with decades-long track records in wealth creation.

#1 Deepak Spinners

First on the list is Deepak Spinners Ltd, a manufacturer specializing in Synthetic Staple Fibres Yarn and blended man-made fibres.

Dolly Khanna has exited her 1.04% stake in the company, as per data available with screener.in.

In terms of performance, Deepak Spinners ranks at the bottom among its peers based on its current Return on Capital Employed (ROCE) of 1.93%, well below the industry average of 8.64%. Leading in the peer comparison is Modern Threads Ltd, with a ROCE of 23.25%.

The company’s 10-year median ROCE stands at 12.50%, lower than the 10-year industry average of 10.97%, indicating a downward trend over time.

On the valuation front, Deepak Spinners currently has a negative price-to-earnings (P/E) ratio, reflecting recent challenges. However, its 10-year median P/E is 5.83x, compared to a peer average of 20x.

The company’s Ebitda has dropped from ₹40 crore in FY19 to ₹20 crore in FY24, a sign of degrowth over the last five years. Sales growth has been weak, with a five-year average of -0.16% and a 10-year compound annual growth rate (CAGR) of just 2%.

Profits have also taken a hit, shrinking from ₹14 crore in FY19 to ₹1 crore in FY24, representing a compounded annual decline of 38%.

Despite financial setbacks, the stock price has risen from ₹81 in November 2019 to its current ₹204, marking an absolute gain of 151%.

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Institutional investors have exited their positions, while promoter holdings remain stable at around 46% over the past three years.

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Looking ahead, the company plans to invest ₹80 crore by the end of FY25, aiming to expand solar power capacity and boost efficiency through increased dyeing capacity for enhanced value addition.

#2 Genesys International

The next stock dropped by a super investor is Genesys International Corp. Ltd, a provider of Geographical Information Services, including photogrammetry, remote sensing, cartography, data conversion, and 3D geo-content for location-based navigation and related services.

Both Hitesh Doshi and Ashish Kacholia reduced their holdings, selling off 1.25% and 1.31%, respectively, in the quarter ended September.

Genesys ranks last among peers in terms of ROCE, with a current ROCE of 8.28%, well below the industry average of 17.88%. Leading in this sector is Tata Elxsi Ltd, boasting a ROCE of 42.74%. Over the past decade, Genesys has maintained a median ROCE of only 3.02%, compared to the 10-year industry median of around 17%.

The company’s shares currently trade at a high P/E ratio of 70x, with a 10-year median P/E of 94x, compared to a peer average of 24x.

Genesys has shown growth in key financial metrics, with Ebitda rising from ₹19 crore in FY19 to ₹81 crore in FY24, a CAGR of 34%. Sales have also grown at a 12% CAGR over the past five years, increasing from ₹115 crore in FY19 to ₹198 crore in FY24. Profits have rebounded from a loss of ₹4 crore in FY19 to a profit of ₹22 crore in FY24, achieving a 61% CAGR.

The stock price has surged, moving from ₹80 in November 2019 to ₹838 currently, marking a growth of approximately 950%.

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No domestic institutional investors hold a stake in Genesys, and promoter holdings have declined from 51% in FY19 to 37% as of September 2024.

Genesys is focusing on advanced surveying and mapping technologies for urban and telecom sectors. The company is also developing unique web-based applications to support these initiatives and aims to establish strategic partnerships in the geospatial and digital content sectors in the near future.

#3 Repro India

Repro India Ltd provides end-to-end print solutions for publishers and corporations, offering services such as value engineering, creative design, pre-press, printing, post-press, warehousing, dispatch, database management, sourcing, procurement, localization, and web-based solutions.

Ashish Kacholia sold his 2.41% stake in the company as of the quarter ended September.

Repro India ranks last among its peers in terms of ROCE, with a current ROCE of 6.06%, significantly lower than the industry average of 16.62%. Leading the peer group is Doms Industries Ltd, which boasts a ROCE of 30.67%. Over the past decade, Repro India has maintained a median ROCE of 3.73%, well below the 10-year industry median of around 7%.

The company’s shares are trading at a high P/E ratio of 80x, with a 10-year median P/E of 37x, compared to a peer average of 26x.

Ebitda has shown modest growth, increasing from ₹45 crore in FY19 to ₹52 crore in FY24, a CAGR of approximately 3%. Sales have grown at a 4% CAGR over the last five years, from ₹399 crore in FY19 to ₹479 crore in FY24. However, profits have declined, with earnings dropping from ₹24 crore in FY19 to ₹12 crore in FY24.

The stock price has also fallen, declining from ₹614 in November 2019 to its current ₹516—a drop of around 16%.

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There are no domestic institutional investors holding stakes in the company, and promoter holdings have declined from 55% in FY19 to 47% as of September 2024.

On a positive note, the company has reduced its debt from ₹150 crore five years ago to ₹48 crore.

#4 Indostar Capital Finance

Next on the list is Indostar Capital Finance Ltd (ICFL), a systemically important non-deposit taking NBFC registered with the Reserve Bank of India (RBI).

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Global investment firm Brookfield, listed on the NYSE and Toronto Stock Exchange, holds a 56% stake in ICFL. Madhuri Madhusudan Kela, wife of prominent investor Madhusudan Kela, had sold her 2.48% holding in the company as of September quarter.

ICFL’s current ROCE stands at 8.35%, the second lowest among peers after Jio Financials at 1.55%. The industry average is 10.35%, with HDFC AMC leading the pack at 37.72%. ICFL’s 10-year median ROCE is the lowest in its peer group at 8.40%, while the 10-year industry median is approximately 8.6%.

The company’s shares are trading at a P/E ratio of 49x, with a 10-year median P/E of 15x, compared to the peer average of 24.13x.

ICFL’s Ebitda has declined 12%, from ₹961 crore in FY19 to ₹849 crore in FY24. Sales have grown at a modest 3% CAGR over the past five years, from ₹1,206 crore in FY19 to ₹1,396 crore in FY24. However, profits have dropped significantly, down 52% from ₹241 crore in FY19 to ₹116 crore in FY24.

The stock price has increased from ₹190 in November 2019 to around ₹291 today, marking a 53% gain.

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As per data available with screener.in for the quarter ended September, ICICI Prudential Life Insurance Co. Ltd, which previously held a 1.36% stake, has sold its position. Promoter holdings, however, have risen from 60% in 2019 to nearly 74% by the end of the same quarter.

Going forward, ICFL plans to focus on expanding its used commercial vehicle (CV) financing and affordable housing finance segments, aligning with its objective to gradually reduce exposure to SME and corporate lending.

#5 Garware Hi-Tech Films

Last on the list is Garware Hi-Tech Films Ltd, a leading manufacturer of polyester films in India.

With over three decades of experience, Garware Hi-Tech is a pioneer in the industry and the largest exporter of polyester films from India. It is also the sole manufacturer of solar control window films in India and one of only two companies globally with patented technology for UV-stabilized dyed films. Additionally, it is the only company worldwide with full backward integration, manufacturing its own raw materials and components for solar control window films.

Ashish Kacholia exited his 2.89% stake in the company as of September quarter.

Garware Hi-Tech is the only company on this list that doesn’t rank lowest in ROCE among its peers, with a current ROCE of 13.96%, slightly above the industry average of 13.59%. Leading the peer group is Inox India, with a ROCE of 43.06%. Garware’s 10-year median ROCE is 12.30%, also above the 10-year industry median of 11.75%.

The company’s shares trade at a P/E ratio of 39x, with a 10-year median P/E of 16x, compared to a peer average of 31.79x.

Garware’s Ebitda grew from ₹144 crore in FY19 to ₹282 crore in FY24, reflecting a CAGR of approximately 14.4%. Sales also expanded at a 12% CAGR over the past five years, increasing from ₹948 crore in FY19 to ₹1,677 crore in FY24. Net profit rose from ₹82 crore in FY19 to ₹203 crore in FY24, achieving a compounded annual growth rate of 20%.

The stock price has surged from ₹234 in November 2019 to its current price of ₹4,194—a remarkable growth of 1,706%.

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Promoter holdings have remained steady at 60% since 2017.

In response to challenges posed by excess capacity and price competition domestically and internationally, the company is actively working to reduce costs and adjust its product mix, cutting down on commodity film volumes.

Red flags?

Among the five stocks reviewed today, common concerns emerge. Four out of five show the lowest ROCE in their respective industries, and many have seen declining promoter holdings and reduced institutional investments.

While these metrics hint at potential red flags, they are surface-level indicators and may not fully explain why India’s top investors have exited these positions. Only the investors themselves know the specific reasons behind their moves, leaving us to speculate.

For more such analysis, read Profit Pulse.

Nonetheless, it’s prudent to keep an eye on stocks they divest from and conduct a deeper analysis to assess if these holdings still offer value—or if it’s time to reconsider keeping them in the portfolio.

Note: This article relies on data primarily from Screener.in and Trendlyne.com. Alternative, widely accepted sources were used only when data from these sites was unavailable. The purpose of this article is solely to share intriguing charts, data points, and thought-provoking perspectives—it is not an investment recommendation. If you are considering any investment, please consult a financial advisor. This article is for educational purposes only.

About the author: Suhel Khan, a dedicated market follower for over a decade, previously served as Head of Sales & Marketing at a leading equity research firm in Mumbai. He now focuses on analysing the investments and strategies of India’s top investors.

Disclosure: The author and their dependents do not hold positions in the stocks discussed in this article.