Loss to Profit Companies to Invest

Turnaround tales are popular on the stock market. These were once losing businesses that are now profitable.

Because the market now expects future earnings and dividends from the firms that have switched from losing money to making money, it raises the price of these stocks.

Investing in companies that have experienced losses in the past and are transitioning towards profitability can be an attractive opportunity, but it also comes with significant risks. Here are some key factors to consider before investing in such companies:

Understanding the Business Model

Thoroughly understand the company's business model and industry. Determine if the company's path to profitability is realistic and achievable.

• Financial Statements:

Analyze the company's financial statements, including income statements, balance sheets, and cash flow statements. Look for trends that indicate improvement in revenue, gross margins, and reduced losses.

• Profitability Timeline:

Assess the company's timeline and strategy for achieving profitability. Understand if there are clear milestones and a realistic timeframe for reaching profitability.

• Management Team:

Evaluate the management team's track record and their ability to execute the company's strategy. Strong leadership is crucial during a turnaround.

• Competitive Environment:

Consider the competitive landscape. Is the company in an industry with high barriers to entry, or does it face intense competition? A challenging competitive environment can make the path to profitability more difficult.

• Debt and Liquidity:

Examine the company's debt levels and liquidity position. High levels of debt can create financial strain and hinder the path to profitability.

• Cash Burn Rate:

Calculate the company's cash burn rate, which indicates how quickly it is using its available cash. Make sure the company has sufficient cash or access to funding to cover its operational needs until it becomes profitable.

• Market Potential:

Assess the size of the company's target market and its growth potential. A large and expanding market can support revenue growth.

• Product or Service Viability:

Evaluate the viability and uniqueness of the company's products or services. Are they meeting a genuine need or solving a problem in the market?

• Regulatory and Legal Risks:

Consider any regulatory or legal risks that could impact the company's ability to operate and become profitable.

• Diversification:

Avoid putting all your investment capital into a single loss-to-profit company. Diversify your portfolio to spread risk.

• Patience and Risk Tolerance:

Understand that investing in turnaround companies can be volatile and may take time to yield returns. Assess your own risk tolerance and investment horizon.

• Research and Due Diligence:

Conduct thorough research, read company reports, and consider seeking advice from financial professionals. Understand the reasons behind the losses and the company's plan for recovery.

• Exit Strategy:

Have a clear exit strategy in mind. Determine under what conditions you would sell your investment, whether it's reaching a specific profit target or if the company's fundamentals deteriorate further.

Overview of the Companies

A. Interglobe Aviation Ltd

India's Aviation Giant: IndiGo, officially known as Interglobe Aviation Ltd, has soared to become India's largest passenger airline. Established in 2006 with just one aircraft, it has since grown its fleet to an impressive 262 planes.

• Market Dominance: With a commanding 55% market share in India and a place among the world's top six carriers, IndiGo has become synonymous with Indian aviation.
• Diverse Revenue Streams: The airline's revenue mix in FY22 primarily consisted of ticket sales (92%), followed by cargo services (6%) and in-flight sales (1%).

Recent Operational Highlights

1. Expanding Fleet: IndiGo's current fleet stands at 275 aircraft, comprising 41 Airbus CEO, 199 Airbus NEO, and 35 ATR aircraft. In FY22, it added 49 new fuel-efficient aircraft powered by PW1100G and CFM LEAP-1A engines.
2. Growing Network: The airline serves 73 domestic and 15 international destinations, including the addition of 8 new destinations in FY22.
3. Cost Competitiveness: IndiGo's strategic orders with Airbus and favorable terms with Original Equipment Manufacturers (OEMs) and maintenance providers have kept its operational costs lower than industry peers.
4. Resilience Amidst Challenges: The aviation industry faced significant losses due to COVID-19, and IndiGo was no exception, enduring losses of 5-6k crores. However, it maintains a healthy cash balance of ~6300 crores to weather subdued demand.
5. Leadership Changes: In a strategic move, Mr. Rahul Bhatia took the helm as Managing Director in February 2022, positioning the airline for its next phase of growth.

Financial Performance

1. Strong Liquidity: IndiGo boasts an impressive free cash balance of ~Rs. 12,195 crore as of March 2023, providing a sturdy financial foundation.

2. Cost Management: The airline's focus on cost competitiveness has resulted in maintaining the lowest Cost per Available Seat Kilometer (CASK) among Indian airlines.

3. Debt Profile: Despite increasing debt levels due to fleet expansion and lease obligations, IndiGo's leverage ratio has improved significantly, standing at ~4.3x in FY23.

4. Mitigating Risks: IndiGo is addressing volatility in crude oil prices and exchange rates by optimizing its fleet mix and capitalizing on operating and finance lease arrangements.

5. Environmental Commitment: The airline is actively pursuing a modern and fuel-efficient fleet to reduce carbon emissions and mitigate environmental risks.

Outlook

1. Network Expansion: IndiGo's focus on expanding connectivity in non-metro Indian cities and international operations is expected to further strengthen its market position.
2. Liquidity Strength: With robust cash reserves and financing arrangements in place, IndiGo is well-prepared to handle challenges, including subdued passenger traffic and fluctuating fuel prices.
3. Cost Efficiency: The airline's commitment to cost competitiveness, coupled with the introduction of more fuel-efficient aircraft, positions it for sustained financial health.
4. Price Sensitivity: IndiGo recognizes the competitive and price-sensitive nature of the Indian aviation market, striving to maintain healthy yields even in the face of competition.
5. Environmental Responsibility: The airline's dedication to reducing emissions and exploring sustainable aviation fuel solutions aligns with global efforts to address environmental concerns in the aviation industry.

Interglobe Aviation Share Price

B. Sakthi Sugars Ltd

1. Diverse Ventures: Sakthi Sugars Limited is a multifaceted company involved in sugar manufacturing, industrial alcohol production, power generation, and soya products.
2. Segment Overview: The company's operations encompass sugar, industrial alcohol, soya products, and power generation, with by-products including molasses, bagasse, and press mud.
3. Global Footprint: While predominantly serving the domestic market (97% in FY22), Sakthi Sugars also exports its products to countries like Vietnam, Korea, Malaysia, the Philippines, the UK, and Saudi Arabia.
4. Manufacturing Prowess: The company boasts five manufacturing units located in rural areas of Tamil Nadu and Orissa. It has substantial capacities, including 19,000 tons of cane crushed per day, 92 MW of power generation, and soybean processing capability of 90,000 tons annually.

Recent Operational Highlights

1. Product Mix: The revenue split across various product segments remained fairly consistent, with sugar accounting for 51%, followed by industrial alcohol (11%), soya products (25%), and power (13%) in FY22.
2. Debt Concerns: The company faced financial difficulties, defaulting on significant dues to various entities since February 2012, leading to a restructuring effort with banks and lenders. However, it successfully settled dues to some banks during FY22.
3. Fundraising Endeavors: Sakthi Sugars' board approved fundraising of 675 crores through private placement of NCDs to settle existing liabilities and meet financial requirements.
4. Shareholding Pledged: Promoters pledged 14.6% of their shareholding in the company, indicating a commitment to its future.
5. Market Challenges: The sugar industry in India faced challenges such as rising sugarcane prices, increasing production costs, and monsoon uncertainties, impacting prospects.

Financial Performance

1. Revenue Growth: The company reported total revenue from operations of Rs. 105,375.54 lakhs in FY23, showing significant growth compared to Rs. 43,167.40 lakhs (excluding discontinued operations) in the previous year.
2. Profit Turnaround: After a net loss of Rs. 15,016.49 lakhs in FY22, Sakthi Sugars achieved a net profit of Rs. 41,781.81 lakhs in FY23. This turnaround was attributed to improved operations and prudent financial management.
3. Key Ratios: Important financial ratios, including debtors turnover, inventory turnover, and interest coverage, showed favorable changes, reflecting the company's improved financial health.
4. Operational Efficiency: Operating profit margins significantly improved from 1.92% to 8.70%, driven by operational enhancements and profitability.

Outlook 

Despite challenges, the outlook for the sugar sector appears positive, with expectations of normal monsoons and adequate sugarcane availability in Tamil Nadu. The industry sees opportunities in ethanol production, power co-generation, and value-added products.
 

Sakthi Sugars Share Price