It was not a recommendation but a suggestion to keep the stock on your watch.
We describe a penny as one that trades at a double-digit price regardless of its market liquidity and liquidity.
Visaka, with its share price of ₹82 per share, perfectly matched this description, as it did trade at a double-digit price. However, it is now a three-digit figure.
Visaka Industries has seen its share price rise by a whopping 100% in less than six months.
The credit for this goes to its recently inaugurated solar panel rooftop segment. It is the first of its kind integrated solar roof and the company has secured a patent not only in India but also in the US and South Africa. The company also started exports to Africa and the Middle East.
Although the prospects of this division do look promising, its contribution to the overall revenues of Visaka Industries is still quite negligible. It is still a very small part of the company’s overall business.
So why are investors leery of the stock you may be asking? Why has it doubled in the last six months despite the monetization of its solar rooftop division being negligible so far?
Well, the share price appreciation seems to be the aftermath of Prime Minister Modi’s big announcement last month.
Right after the consecration of Ram Mandir, Prime Minister Modi set the ball rolling on a new scheme to boost rooftop solar installations.
Here he is outlining the plan: “Today, on the auspicious occasion of the consecration of life in Ayodhya, my resolve has been strengthened that the people of India should have their own solar roof system on the roof of their houses.
The first decision I took after coming back from Ayodhya is that our government will launch ‘Pradhan Mantri Suryodaya Yojana’ with the objective of installing rooftop solar on 1 crore houses.”
This is a big one. Just to put things in perspective, only about 7 lakh households are estimated to have rooftop solar installations currently. Modi’s new scheme proposes to multiply this number by a whopping 15x.
Not surprisingly, stocks like Visaka Industries, which have expertise in this area, have suddenly become the new favorites of the investors.
On 20 January 2024, the last trading day before Modi’s big announcement, Visaka Industries was priced at ₹102 per share. In an almost one-way ride since then, the stock has climbed more than 60% and looks poised to go even higher. Those are big gains indeed.
However, let’s wear the hat of a contrarian investor for a moment and think is this euphoria justified?
After all, we have no idea if this deal will take off and to what extent. And even if it does, how many benefits will flow to companies like Visaka Industries? And so, unless we have some numbers to back up our opinions, investing in the stock just because of the massive announcement seems like indulging in speculation to me.
This is how we will assess the situation.
When we came out with the video, the stock was trading at a small discount to book value. The reason we felt that the risk reward was in favor of the investor is that it was not greatly valued based on its historical valuations. In fact, it was slightly underrated.
Thus, even a small increase in earnings from current levels would have seen the stock give above-average returns from a 1-2 year perspective.
We have not assigned any valuation to the new solar roof business as the company has just started in this segment.
Cut to the present day and the stock is trading at nearly 2x its current book value. This means that the new business is valued almost the same as the current business. Investors are willing to value the solar roof business almost at par with the current business.
Is that justified?
With little understanding of how this new business will pan out, the answer would be “no.” We would be more comfortable not assigning any value to it and valuing the stock based on its current earning power.
This may not be the case for those who have a good understanding of the solar roof business and can therefore quantify the business opportunity that is staring Visaka Industries in the face.
To them, the stock may look significantly undervalued even at current valuations.
Thus, it all boils down to being honest with yourself and performing your assessment accordingly. At the end of the day, your returns on the stock will not depend on whether you bought Visaka Industries at ₹80 or ₹160.
It will depend on how honest you were about your understanding of the business. If you believe its best days are still ahead of it, you can make money even at current valuations.
But if you can only value the current business and not the new one, then maybe you shouldn’t pay any premium over what it commanded in the past.
The approach may sound simple, but it can take you quite far in investing.
Happy Investing.
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com