Why is Westlife Food falling/rising?

Recent Price Movement and Market Context

Westlife Foodworld’s shares have gained 3.57% over the past week, significantly outperforming the Sensex’s 0.87% rise during the same period. This recent uptick includes a consecutive two-day gain, with a cumulative return of 2.36%, signalling renewed investor interest. The stock’s current price is above its 5-day and 20-day moving averages, indicating short-term strength, although it remains below longer-term averages such as the 50-day, 100-day, and 200-day marks. This suggests that while the immediate trend is positive, the stock has yet to fully recover from its longer-term downtrend.

However, the month-to-date performance remains negative at -3.16%, contrasting with the Sensex’s 2.03% gain, and the year-to-date return is deeply negative at -27.31%, while the benchmark index has advanced by 9.60%. Over the last year, Westlife Foodworld’s stock has declined by 24.23%, underperforming the Sensex’s 7.32% rise. These figures highlight the company’s struggle to regain investor confidence over a sustained period.

Financial Performance and Operational Challenges

Despite the recent share price rise, Westlife Foodworld faces significant financial headwinds. The company has reported negative results for eight consecutive quarters, with the latest quarterly PAT at a loss of ₹11.89 crore, a steep decline of 570.1% compared to the previous four-quarter average. Operating cash flow for the year is also negative at ₹-2.16 crore, and quarterly PBDIT has fallen to ₹67.14 crore, marking the lowest level in recent periods. These figures underscore ongoing operational difficulties and weak profitability.

Moreover, the company’s ability to service debt is a concern, with a high Debt to EBITDA ratio of 4.16 times, indicating elevated leverage and potential financial strain. The average Return on Equity (ROE) stands at a modest 8.09%, reflecting limited profitability relative to shareholders’ funds. The most recent ROE is negative at -0.3, while the stock trades at a high Price to Book value of 14.4, suggesting an expensive valuation despite the company’s subdued earnings performance.

Investor Participation and Institutional Backing

Investor participation has diminished recently, with delivery volume on 28 November falling by 79.14% compared to the five-day average, signalling reduced trading activity and possibly cautious sentiment among retail investors. Nevertheless, institutional investors hold a significant 35.2% stake in the company. This level of institutional ownership often reflects confidence from more sophisticated market participants who have the resources to analyse the company’s fundamentals thoroughly. Such backing may be contributing to the recent price resilience despite the company’s financial challenges.

Liquidity remains adequate for trading, with the stock’s daily traded value supporting transactions up to ₹0.26 crore based on 2% of the five-day average traded value. This ensures that investors can enter or exit positions without excessive price impact, which can be a factor in the recent price stability.

Long-Term Growth Prospects Versus Valuation Concerns

On a positive note, Westlife Foodworld has demonstrated healthy long-term growth in operating profit, expanding at an annual rate of 26.95%. This suggests that the company’s core business has underlying strength and potential for recovery. However, this growth has not yet translated into consistent profitability or positive returns for shareholders, as evidenced by the negative earnings and underwhelming stock performance over multiple time horizons.

The stock’s valuation appears expensive relative to its current profitability, with a Price to Book ratio of 14.4 despite a negative ROE. While it trades at a discount compared to its peers’ historical averages, the company’s recent profit decline of 109.9% over the past year and its underperformance against the BSE500 index over one, three, and five-year periods raise questions about its near-term outlook.

In summary, Westlife Foodworld’s recent share price rise on 01-Dec reflects short-term optimism possibly driven by institutional support and a modest rebound in trading momentum. However, the company’s persistent losses, high leverage, and expensive valuation continue to weigh heavily on its stock performance. Investors should weigh these mixed signals carefully when considering exposure to this stock.

Get 2 full years of MojoOne Premium for only Rs. 12,999. Subscribe for 1 year and we'll add another year FREE. Offer valid for a limited time. Start Saving Now →