Vivid Mercantile Ltd Upgraded to Buy on Strong Technical and Financial Performance

Quality Assessment: Mixed Signals Amidst Financial Strength

Vivid Mercantile’s quality metrics present a nuanced picture. The company reported an impressive Return on Equity (ROE) of 16.8% in the latest quarter, indicating efficient utilisation of shareholder funds and a strong profit-generating capacity. This is a positive sign for investors seeking companies with solid fundamentals. However, the long-term fundamental strength remains weak, as evidenced by an average Return on Capital Employed (ROCE) of just 0.58%, which suggests that the company has struggled to generate returns on its capital investments over time.

Additionally, the company’s ability to service debt is a concern, with an average EBIT to Interest ratio of 1.20, signalling limited cushion to cover interest expenses. This weak debt servicing capacity could pose risks if market conditions deteriorate or if the company’s earnings falter. Furthermore, promoter confidence has waned, with a significant 27.22% reduction in promoter stake over the previous quarter, leaving promoters holding only 11.8% of the company. Such a decline often raises questions about the insiders’ outlook on the company’s future prospects.

Valuation: Attractive Price-to-Book Ratio Supports Upgrade

From a valuation standpoint, Vivid Mercantile is trading at a Price to Book (P/B) ratio of 1.3, which is considered very attractive relative to its peers and historical averages. This valuation suggests that the stock is reasonably priced and offers potential upside if the company can sustain its recent performance improvements. The fair valuation is a key factor in the upgrade, as it indicates that investors are not overpaying for the stock despite its recent underperformance.

However, it is important to note that the stock has underperformed the broader market over the past year, delivering a negative return of -11.21% compared to the BSE500’s positive 13.16% gain. This underperformance reflects some investor caution, likely due to the company’s mixed financial signals and promoter stake reduction.

Financial Trend: Exceptional Quarterly Growth Counters Yearly Profit Decline

The financial trend for Vivid Mercantile has been a tale of two timelines. The company posted outstanding quarterly results for Q3 FY25-26, with net sales surging by an extraordinary 2108.76%, reaching Rs 31.63 crores in the latest six months. Profit before depreciation, interest, and taxes (PBDIT) also hit a record high of Rs 8.02 crores, while profit before tax excluding other income (PBT less OI) stood at Rs 8.01 crores, marking the strongest quarterly performance in recent history.

Despite this impressive quarterly growth, the company’s annual profits have declined by 14.1%, contributing to the negative 11.21% stock return over the past year. This divergence suggests that while recent operational improvements are significant, the company is still recovering from earlier setbacks or cyclical challenges in the realty sector.

Longer-term returns paint a more optimistic picture. Over three years, Vivid Mercantile has delivered a remarkable 93.61% return, substantially outperforming the Sensex’s 39.74% gain. Over five years, the stock’s return of 231.9% dwarfs the Sensex’s 67.42%, highlighting the company’s potential for wealth creation over extended periods despite short-term volatility.

Technicals: Upgrade Driven by Bullish Momentum and Indicators

The primary catalyst for the upgrade to Buy is the marked improvement in technical indicators, which have shifted from mildly bullish to bullish overall. Key technical signals include:

• MACD: Weekly readings are bullish, although monthly remain mildly bearish, indicating short-term momentum is strengthening.
• RSI: Both weekly and monthly readings show no significant signal, suggesting the stock is not overbought or oversold.
• Bollinger Bands: Weekly indicators are mildly bullish, with monthly bands confirming a bullish trend, signalling increasing price volatility in a positive direction.
• Moving Averages: Daily moving averages are bullish, supporting the short-term upward price momentum.
• KST (Know Sure Thing): Weekly readings are bullish, while monthly remain mildly bearish, reflecting improving momentum on a shorter timeframe.
• Dow Theory: Weekly shows no clear trend, but monthly is mildly bullish, indicating a nascent uptrend at a broader level.

These technical improvements are significant given the stock’s recent price action. The current price stands at Rs 6.97, slightly down from the previous close of Rs 7.07, with a 52-week high of Rs 10.82 and a low of Rs 3.98. The stock’s short-term technical momentum is gaining traction, which supports the upgrade despite the recent 1.41% day decline and a one-week return of -3.06% versus the Sensex’s flat 0.02%.

Market Context and Outlook

Vivid Mercantile operates within the construction and real estate industry, a sector that has experienced cyclical fluctuations in recent years. The company’s long-term outperformance relative to the Sensex and BSE500 indices underscores its potential as a growth stock, albeit with volatility. The recent upgrade to a Buy rating by MarketsMOJO, reflected in a Mojo Score of 71.0 and a Mojo Grade upgrade from Hold to Buy, signals that the stock is now viewed as a more attractive investment opportunity based on a balanced assessment of quality, valuation, financial trends, and technical momentum.

Investors should remain mindful of the risks posed by weak long-term fundamentals, debt servicing challenges, and reduced promoter confidence. However, the strong quarterly results and improved technical indicators provide a compelling case for a positive near-term outlook.

Summary

In summary, Vivid Mercantile Ltd’s upgrade to a Buy rating is driven by a combination of factors: a very attractive valuation with a P/B of 1.3, exceptional quarterly financial performance with net sales growth exceeding 2100%, and a shift in technical indicators to a bullish stance. While the company faces challenges such as weak ROCE, debt servicing concerns, and promoter stake reduction, the improved momentum and strong recent results have outweighed these negatives in the rating revision. Investors looking for exposure to the realty sector with a stock showing signs of technical and fundamental recovery may find Vivid Mercantile an appealing candidate for their portfolios.

Limited Period Only. Start at Rs. 9,999 - Get MojoOne for 1 Year + 3 Months FREE (60% Off) Get 71% Off →