Turnaround Stories ft. Windmill Capital

We all get fascinated with turnaround stories, don’t we? Especially if we see it unfolding in front of us. In this edition of smallcase in focus, we discuss with you four such companies that have displayed remarkable business resilience and have risen from the slump. 

For context, all these four companies were once a part of our smallcase(s), however got dropped along the way for one issue or another. However and more importantly, have found their way back to our portfolios. The companies are – Interglobe Aviation, Indian Hotels, Ashok Leyland, Karur Vysya Bank.

Let’s get right to it.

• Interglobe Aviation (Indigo)

Legend has it, running a low-cost airline in any part of the world is a herculean task. With a bunch of expensive costs, the economic viability of a low-cost airline has always been in question. And, over the years, it’s seen that perhaps the only foolproof way to tackle the horns is through exceptional execution. That’s what Interglobe Aviation stands for – Execution. 

We had Interglobe Aviation in our smallcases from 2017 until in mid 2018 we decided to drop the stock. You see around 2018-19, the airline industry was grappling with a whole host of issues. High fuel prices, fare wars, and a depreciating rupee. Only if this was not enough, Jet Airways, one of the oldest & biggest airlines in India was on the verge of bankruptcy. Naturally, the performance of Interglobe Aviation got impacted.

Then the COVID-19 pandemic crushed all remaining hopes for the industry with a travel ban. That being said, since the latter half of 2022 pent up travel demand began to reflect for airlines. Coupled with that, Indigo kept sharpening its execution prowess. From a strategy standpoint, given they have more than 50% market share in the domestic market, their focus has turned towards becoming a leader in the international market as well. Hence we included it back in our smallcases in 2023 and we are firm believers in the long term story of Indigo. 

• Indian Hotels (Taj Hotels)

Indian Hotels was part of some of our smallcases between 2017-2019.. A worrying trend that we noticed with the business was revenue stagnation. Take a look at the chart attached below. From FY17 to FY20, the revenue was almost the same.

We have to admit that we were lucky with the exit, as we dropped the stock just two quarters before COVID hit us. Then, pretty much the same story. No travel, no business. 

Indian Hotels found its way back to our smallcases in Mar ‘23 as things began transitioning to normalcy and the COVID woes subsided. Moreover, with some key events lined up in India – G20 meet, Cricket World Cup, IPL we believe the hospitality industry will benefit immensely, Indian Hotels being our pick of the lot. And again, numbers speak for themselves. The revenue trend in the above chart is a clear enough indication of where the company is heading towards. 

• Ashok Leyland 

Ashok Leyland is one of the most prominent players in the heavy commercial vehicles segment in India. The company was a part of our Auto Tracker smallcase since inception, i.e. 2016. 

2019 was a fantastic year for auto companies in India with everything going in their favor. Then 2020 was a shocker and it was a tumultuous ride for all of them as it was a hard landing.  Amidst this, one quarter into COVID-19, Ashok Leyland’s management decided to cut capex by 40% aiming for leaner operations. Not to mention, chip shortages and supply chain issues. Amidst a COVID breakout, inter-dependencies between countries became a huge problem.

We included it back into Auto Tracker in Jun ‘23. What was the trigger?

Commercial Vehicle cycle revival. Ashok Leyland managed to recover lost market share and  expansion of revenue pools. In FY23, a significant amount of primary demand was observed, which was absent in FY20-21. The company plans to invest INR 1200 crores next year and it will continue to focus on the electric segment with dedicated capex coming back to different segments. Quite a turnaround, isn’t it?

• Karur Vysya Bank

Karur Vysya Bank was a constituent in the Banking Tracker smallcase since 2017. Along the way, two major problems compelled us to drop the stock in 2019. What were they?

Non-Performing Loans (NPAs) and Net Interest Margin (NIM). For the uninitiated, NPAs are loans that have been defaulted on, i.e. the bank has given out the loan but not received it back. On the other hand, NIM is the net difference between the rate at which the bank borrows money and the rate at which it lends. For instance, if the bank borrows money at 4% and lends it out at 6%, NIM will be 2%.  

You see, like any other industry, few operating metrics are sacrosanct to the banking industry. In the case of banking companies, NPAs and NIM are instrumental to their performance. For the purpose of this analysis, we will focus on these two, while there are other important KPIs too. Attached below are two charts displaying the trend of these two operating metrics. 

The NPA shot up drastically between FY17 and FY19 which led to our decision of dropping the company from the smallcase. However, look at the second half of the story. The bank got its act together and brought down the NPA levels to historic lows. A quite similar analysis can be done on NIM, where it deteriorated to all time lows followed by a sharp revival. Hence and quite interestingly enough, NPAs and NIM were the reason for removal and addition to the smallcase.  

As mentioned in previous blog posts, our approach at Windmill Capital is to remain flexible and open to change at all points of time. Just because we have dropped a company from our universe, does not mean that we will never re-consider the company, in spite of improving fundamentals. And honestly, that is the reality of markets. What was junk 5 years ago, could transform to gold today. One has to always keep the door open for new possibilities. We function with this ethos and we are glad that more often than not it has worked for us. Numbers convey narrative. 

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