Why is Super Tannery Ltd falling/rising?

Recent Price Movement and Market Context

Super Tannery Ltd’s sharp rise on 01-Feb stands out against a backdrop of mixed performance over various time frames. While the stock has surged 14.05% in the past week, it remains down marginally by 0.58% over the last month and 1.16% year-to-date. This contrasts with the broader Sensex, which has declined by 1.00% over the week and 5.28% year-to-date, highlighting the stock’s relative resilience in recent sessions despite longer-term challenges.

The stock’s recovery after two consecutive days of losses suggests a short-term trend reversal, supported by its current trading price being above the 5-day, 20-day, and 50-day moving averages. However, it remains below the 100-day and 200-day averages, indicating that while momentum is improving, the longer-term trend remains cautious.

Liquidity remains adequate for trading, although investor participation has waned, with delivery volumes on 30 Jan falling by 45.35% compared to the five-day average. This reduced participation may imply that the recent price rise is driven by selective buying rather than broad market enthusiasm.

Valuation and Profitability Insights

Despite the recent price appreciation, Super Tannery Ltd’s fundamentals present a complex picture. The company boasts a Return on Capital Employed (ROCE) of 8.3%, which is considered very attractive relative to its peers, and an enterprise value to capital employed ratio of 0.8, signalling a valuation discount. Moreover, the company’s profits have increased by 23.5% over the past year, even as the stock price declined by 36.56% during the same period. This discrepancy is reflected in a low PEG ratio of 0.4, suggesting that the stock may be undervalued relative to its earnings growth potential.

Majority ownership by promoters adds a layer of stability, often viewed favourably by investors seeking aligned interests. These factors likely contribute to the recent buying interest and price recovery, as investors may be recognising value in the stock’s discounted valuation and improving profitability metrics.

Challenges Tempering Long-Term Outlook

However, the company’s longer-term fundamentals remain under pressure. The average ROCE over time is weaker at 7.13%, and growth rates for net sales and operating profit over the past five years, at 11.11% and 14.65% respectively, are modest. Additionally, the company’s ability to service debt is limited, with a high Debt to EBITDA ratio of 3.39 times, raising concerns about financial leverage and risk.

Quarterly performance indicators also highlight challenges, with the latest PAT at ₹0.69 crore falling sharply by 64.9% compared to the previous four-quarter average. Net sales and profit before tax excluding other income are at their lowest levels, signalling near-term operational difficulties. These factors have contributed to the stock’s underperformance relative to the BSE500 index over one, three, and five-year periods.

Balancing Short-Term Gains with Long-Term Risks

The 10.36% rise in Super Tannery Ltd’s share price on 01-Feb can be attributed primarily to a short-term technical rebound and valuation appeal amid broader market weakness. The stock’s outperformance relative to its sector and the Sensex over the past week underscores renewed investor interest, possibly driven by the company’s attractive ROCE and profit growth despite a challenging operating environment.

Nevertheless, the company’s weak long-term growth trajectory, high leverage, and recent quarterly profit declines caution investors against over-optimism. The stock’s position below longer-term moving averages and falling delivery volumes suggest that the rally may be tentative and subject to volatility.

Investors should weigh the current valuation discount and improving profitability against the structural challenges and subdued sales growth before making investment decisions. The recent price rise reflects a nuanced market response that balances optimism on value with caution on fundamentals.

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