Why is AB Cotspin India Ltd falling/rising?

Recent Price Momentum and Market Comparison

AB Cotspin’s price surge on 19-Feb is part of a broader positive trend. The stock has gained 1.76% over the past week, contrasting with the Sensex’s decline of 1.41% during the same period. Over the last month, the stock’s return of 7.90% significantly outpaced the Sensex’s negative 0.90%. Year-to-date, AB Cotspin has advanced 6.60%, while the benchmark index has fallen 3.19%. This consistent outperformance highlights growing investor confidence in the company’s prospects despite broader market headwinds.

On the day in question, the stock opened with a gap up of 5.18%, maintaining this level throughout the trading session and reaching an intraday high of Rs 444. The stock’s volatility was elevated, with an intraday volatility of 8.05%, indicating active trading interest. Moreover, AB Cotspin is trading above all key moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day averages, signalling a strong technical position.

Fundamental Drivers Behind the Price Rise

The primary catalyst for AB Cotspin’s recent price appreciation is its robust long-term operating profit growth. The company has achieved an impressive annualised operating profit growth rate of 49.57%, underscoring its ability to expand earnings despite challenges in the broader textile and garment sector. This healthy profit trajectory provides a strong foundation for investor optimism.

Additionally, the stock’s performance today outpaced its sector by 6.24%, reflecting relative strength within its industry group. The stock has also recorded gains for two consecutive days, accumulating a 6.22% return in this short span, which further supports the positive momentum narrative.

However, it is important to note that investor participation has declined recently, with delivery volumes on 18-Feb falling by nearly 68% compared to the five-day average. This suggests that while the price is rising, the underlying trading activity may be less broad-based, potentially indicating cautious optimism among market participants.

Challenges Tempering the Upside

Despite the encouraging price action and profit growth, AB Cotspin faces several fundamental headwinds that could constrain its valuation. The company’s Return on Capital Employed (ROCE) stands at a modest 9.56%, signalling relatively low efficiency in generating profits from its capital base. Similarly, the Return on Equity (ROE) is low at 9.47%, indicating limited profitability for shareholders.

Debt servicing capacity is another concern, with a high Debt to EBITDA ratio of 3.61 times. This elevated leverage ratio suggests the company may face challenges in managing its debt obligations, which could weigh on investor sentiment if not addressed.

Moreover, the company’s recent quarterly results were flat, with Profit Before Tax excluding other income falling by 38.8% compared to the previous four-quarter average. Non-operating income constitutes a significant 44.35% of the profit before tax, raising questions about the sustainability of earnings quality.

Valuation metrics also point to a premium, with an enterprise value to capital employed ratio of 3.9 times, which is considered expensive given the company’s moderate profitability metrics. Over the past year, the stock has generated no return despite a 49% rise in profits, reflecting a disconnect between earnings growth and market valuation.

Finally, the absence of domestic mutual fund holdings, which stand at 0%, may indicate a lack of institutional conviction. Mutual funds typically conduct thorough research and their minimal stake could suggest reservations about the company’s price or business fundamentals.

Conclusion: Why the Stock Is Rising Despite Concerns

In summary, AB Cotspin India Ltd’s share price rise on 19-Feb is primarily driven by its strong recent price momentum, significant long-term operating profit growth, and outperformance relative to the Sensex and its sector. The technical strength reflected in trading above all major moving averages and the gap-up opening further fuel positive sentiment.

Nevertheless, investors should remain cautious given the company’s low management efficiency, high leverage, flat recent earnings excluding non-operating income, and expensive valuation multiples. The lack of institutional backing also suggests that the rally may be driven more by short-term trading dynamics than broad-based confidence.

For investors, the current rise in AB Cotspin’s stock price offers an opportunity to capitalise on its operational growth, but it is essential to weigh these gains against the underlying financial risks and valuation concerns before making investment decisions.

Limited Time Only! Subscribe for Rs. 12,999 and get 1 Year of MojoOne + an Additional Year Completely FREE. Don't miss out on this exclusive offer. Claim Your Free Year →