The Special Opportunity: How unique corporate situations can create multi-baggers

There's a wave of excitement in the mutual fund arena with the launch of several "Special Opportunities" schemes, including the latest addition from Kotak Mahindra Mutual Fund. These funds are designed to seize unique market conditions and corporate events that can profoundly impact stock values. This category has given exceptional returns in the past with 4 funds delivering 42 per cent returns over 1 year, 19 percent over 2 years and 18 percent over 3 years.

Harsha Upadhyaya, CIO-Equity at Kotak Mahindra AMC, enthusiastically elaborates on successful examples of these "Special Opportunities" in the past.

Upadhyaya assures that their fund will actively pursue both top-down and bottom-up opportunities, catering to both short-term gains and long-term prospects. While the fund steers clear of market timing tactics, Upadhyaya believes robust market conditions often catalyse corporate actions like sellouts and spin-offs, presenting a buffet of special opportunities to capitalize on.

Policy change

Changes in government policies can create significant investment opportunities, such as regulatory reforms or new legislation impacting specific sectors. For example, restrictions on imports over the years have benefited the defense sector. In 2020, Defence Minister Rajnath Singh announced an embargo on imports to be progressively implemented between 2020 and 2024 to promote indigenization.

Since then, the Nifty India Defence Index has grown at a 68 percent CAGR, with companies like Hindustan Aeronautics and Bharat Electronics growing at 82 percent and 70 percent CAGR, respectively.

kotak mahindra MF1 R

Another impact of policy change was seen in the pharma sector where the US Hatch Waxman Act facilitated the entry of generics after patent expiry and changed the focus from process patents to product patents. Process patents helped Indian companies develop chemistry skills, while the shift to product patents eased their entry into global markets through product licensing. Similarly, the Real Estate Index has grown 24.7 percent CAGR, since the introduction of RERA in May 2017. The act brought in regulation on registration and payments.

Mergers and acquisitions

Corporate mergers and acquisitions can create value, reduce costs, and expand market reach. For instance, in March 2020, the joint venture between Linde India and Praxair, forming Linde South Asia Services, achieved synergies worth Rs 175 crore post-merger, significantly boosting shareholder value. The company's market cap grew from Rs 5,800 crore in 2019 to Rs 70,400 crore in 2024.

Industry consolidation

Industry consolidation can enhance competitiveness and market conditions. For example, in the aviation sector, Interglobe Aviation (Indigo) increased its market share from 34 percent in FY2019 to 62 percent in FY2024. "The leader has continued to gain market share and consolidate their position, delivering strong returns," explains Harsha. The stock has compounded at a rate of 21.5 percent during this period.

kotak mahindra MF3 R2

Demerger

Splitting a company into separate entities can unlock value by allowing each to focus on core operations and improve efficiency. For example, Orient Paper's demerger of its cement and electrical businesses led to significant growth. Since the demergers in April 2012 and March 2017, respectively, combined revenues have grown 2.5x between FY 2012 and FY 2023, and the market cap has increased 110x.

Management change

Changes in management can signal a new strategic direction and unlock shareholder value. "When senior management changes, especially after a period of underperformance, it's important to assess if the new team can alter the company's growth trajectory," explains Upadhyaya. For instance, after management changes at Persistent Systems in October 2020, the stock price grew at a CAGR of around 60 percent.

.

.

Buyback

Share buybacks can boost share value. For example, Larsen and Toubro's 2023 buyback led to a nearly 46% increase in stock value by May 2024 to Rs3838. A buyback was announced on at Rs 3,200 per share on 26 July, 2023 and L&T repurchased up to Rs 10,000 crore worth of shares through the buyback.

Operating leverage

Assessing special situations involves studying balance sheets to anticipate business turnarounds. For instance, Jindal Steel and Power (JSPL) leveraged operational performance to reduce debt significantly. Over the past five years, it reduced net debt from Rs 39,000 crore in FY2019 to Rs 11,200 crore in FY2024, supported by a strong steel cycle. The stock price increased 511 percent over the period. Market cap during that period increased Rs 17400 crore to Rs 86,600 crore.

,

Partly paid shares

Investing in partly paid shares, which require partial payments at a lower price rather than full upfront payment, can present unique opportunities, especially for companies with strong growth potential but current underperformance. Once fully paid, these shares convert to regular shares and trade at market prices. Notable examples include Bharti Limited and Reliance Industries.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.