Inside Radhakishan Damani’s winning portfolio: Two smallcap stocks to watch

Advani Hotels & Resorts (India) Ltd

Advani Hotels & Resorts operates the Caravela Beach Resort, a 5-star deluxe luxury beach property recognized for its exceptional hospitality and guest services. The resort also features a restaurant, bar, and banqueting facilities, expanding its reach into event hosting and fine dining for travelers and locals alike.

Stock performance:

1-Year Return: ~25% growth

3-Year Return (CAGR): ~23% appreciation

5-Year Return (CAGR): ~21% increase

Damani’s stake:

As of September 2024, Radhakishan Damani holds a 4.18% stake in the company.

By investing in businesses like Advani Hotels & Resorts, Damani demonstrates his knack for identifying opportunities in niche sectors with strong growth potential and resilient business models. Stay tuned as we uncover more from his portfolio.

What’s driving performance?

Post-pandemic, India’s domestic leisure travel market has grown at a double-digit rate (~15% YoY) as travellers increasingly explore local destinations over international travel. Advani Hotels, with its premium beach resort property, is well-positioned to ride this wave.

Improved occupancy & ARR:

Occupancy Rates: Climbed from ~84% in FY23 to ~88% in FY24.

Average Room Rate (ARR): Increased from ~ ₹17,000/night to over ₹19,000/night.

Company’s Financials:

FY24 Revenue: ~ ₹108 crore, an 8% increase from ~ ₹98 crore in FY23.

FY24 PAT: ~ ₹25 crore, a 14% decline from ~ ₹29 crore in FY23.

Growth drivers

Direct booking growth: A shift from third-party OTAs (charging 15–20% commission) to direct booking channels could save significant costs. For example, reducing commission expenses by ₹2 crore on ₹100 crore revenue would boost net profit by ~1.5%.

Value-added services: Expanding offerings such as weekend events, spa packages, and gourmet experiences can increase ancillary revenue from the current ~15% to 20% of total revenue. Each additional ₹1 crore in high-margin F&B or wellness revenue could add ₹20–25 lakh to EBITDA.

Longer stays & packages: Tapping into the growing “workcation" trend, where guests stay for extended periods (2–4 weeks) at higher blended rates, could generate incremental revenue running into several crores annually, while also smoothing out seasonal revenue fluctuations.

Risk factors

Seasonality and concentration risk: Reliance on a single marquee property or specific tourist destination poses risks. Factors like weak monsoons, regional travel advisories, or local infrastructure issues could lower occupancy by 5–10%, wiping out several crores in annual revenue.

Competitive pressure: The opening of new luxury properties could challenge Advani Hotels’ ability to maintain ARR premiums. A 5% ARR reduction could result in an ₹8–10 crore annual revenue loss.

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Rising costs and wage inflation: Staff costs and utility expenses have surged by ~25% this year. Without corresponding rate hikes or cost efficiencies, profit margins may erode further. Net margins have already dropped by 5% in FY24.

Valuation

Advani Hotels & Resorts currently trades at approximately 28x earnings, a figure that might seem steep given its reliance on a single marquee property operating near full capacity. With room rates already at the upper end of the market range, driving meaningful revenue growth without portfolio expansion or additional revenue streams could prove challenging.

Industry comparison: Valuations across the hospitality sector are nuanced. Larger hotel chains often command richer multiples due to diversified portfolios or multiple properties. In comparison, peers like Sayaji Hotels and Kamat Hotels trade at slightly higher multiples (~30x earnings) but fall short of Advani’s strong occupancy rates, operational efficiency, and near-zero debt profile.

Advani’s debt-free balance sheet is a notable advantage, offering financial stability and operational flexibility—a competitive edge that many industry players lack.

Growth potential: The company’s valuation ultimately hinges on its ability to grow beyond its flagship property. Expanding its footprint through new properties, strategic partnerships, or enhancing ancillary revenue streams could not only justify its current valuation but also position it to exceed it. Advani’s success in replicating its flagship resort model will be key to unlocking further value.

Bhagiradha Chemicals & Industries Ltd

Stock Performance

1-Year Return: ~122% growth

3-Year Return (CAGR): ~71% appreciation

5-Year Return (CAGR): ~59% increase

Shareholding by Radhakishan Damani (as of September 2024): 3.46%

What’s driving performance?

Growing agrochemical demand: India’s agrochemical market is growing 8–10% annually, supported by the push for food security and better yields. Globally, tightening environmental norms are nudging farmers towards more advanced crop protection solutions. Bhagiradha, with its expanding product portfolio, is well-placed to tap both domestic and export demand.

Portfolio diversification: Beyond standard insecticides and fungicides, the company invests in specialty molecules that command higher ASPs (5–10% above commodity products) and are less price-sensitive, strengthening margins.

Financial performance:

FY24 Revenue: ~ ₹408 crore, down from ~ ₹502 crore in FY23 (~20% decline).

FY24 PAT: ~ ₹18 crore, compared to ~ ₹45 crore in FY23 (~60% decline).

Drivers for further upside

Regulatory advantage: Securing early registrations for advanced, less toxic molecules in export markets such as Sub-Saharan Africa and Southeast Asia could unlock new revenue streams worth ₹50–100 crore annually within a few years.

Value-added partnerships: Forging partnerships with large agribusinesses for exclusive supply agreements could stabilize demand at favourable prices. For instance, a single long-term contract contributing ₹50 crore in annual sales could add ₹8–9 crore to Ebitda.

Operational efficiency: Streamlining the working capital cycle by 10 days could free up ₹30–40 crore in cash, potentially saving ₹2–3 crore in annual financing costs, directly boosting net profits.

Issues that can cap upside

Regulatory hurdles: Unforeseen bans or stringent regulations on a key molecule could lead to a revenue loss of ₹50–100 crore, requiring expensive adjustments to the product mix.

Volatile input costs: Raw materials tied to petrochemical or commodity cycles pose risks. A 5% hike in feedstock costs without a corresponding ASP increase could reduce annual profits by ₹6–7 crore.

Global competition: Large international agrochemical firms with stronger R&D capabilities could outpace Bhagiradha, leading to price wars or faster rollouts of superior products. Such developments might compress margins by 1–2 percentage points.

Exit from key geographies: The company’s withdrawal from North and South American markets in FY24 is a notable concern. With no sales from these critical territories, Bhagiradha’s long-term strategy and competitiveness in high-potential regions come into question. Rebuilding a foothold in these markets will be essential to restoring global presence and tapping into significant growth opportunities.

Valuation

Bhagiradha Chemicals is currently trading at approximately 200x earnings—a valuation that would appear steep to most investors, especially considering its recent decline in sales and profits. In contrast, many peers in the agrochemical sector trade at more modest multiples of around 35x earnings, while delivering significantly higher absolute sales and profit figures.

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Historically, Bhagiradha’s higher margins may have justified its premium valuation. However, recent trends raise concerns. Operational metrics, such as cash conversion cycles, have lengthened, indicating potential inefficiencies in liquidity management and overall operations. These shifts from strong to more average performance metrics cast doubt on whether the company can continue to command such a high valuation multiple.

Bhagiradha’s future growth will hinge on broad-based demand—both global and domestic—and its ability to manage commodity price fluctuations. The company’s product offerings lack significant differentiation, with pricing often dictated by market forces outside its control. Without a more distinctive product mix or substantial moves to scale operations, altering its growth trajectory quickly remains a challenge.

Should you follow these investments?

Deciding whether to follow Radhakishan Damani’s investment choices requires aligning them with your own financial goals and risk tolerance. Damani is known for his long-term perspective, often holding stocks through market cycles based on strong fundamentals. This patience enables his investments to grow over time, even amid setbacks or short-term negative returns.

For more such analysis, read Profit Pulse.

While studying Damani’s portfolio offers valuable insights, your investment strategy should be tailored to your unique circumstances. Adopting elements of his fundamentals-driven, long-term approach can be advantageous, but ensure that your decisions align with your financial situation and capacity for risk.

Note: This article relies on data from Tijori Finance and the respective company’s annual reports. For forecasting, assumptions have been used.

The primary purpose of this article is to share insightful charts, data points, and thought-provoking opinions. It is NOT an investment recommendation. Readers are strongly advised to consult their financial advisors before making any investment decisions. This article is intended solely for educational purposes. The views expressed are my own and do not represent those of my current or previous employers.

About the author: Parth Parikh has over a decade of experience in finance and research. He currently heads the growth and content vertical at Finsire and holds an FRM Charter along with an MBA in Finance from Narsee Monjee Institute of Management Studies. Parth has a strong interest in Indian and global equities and has previously held research roles at various companies.

Disclosure: The author and his dependents do not hold shares of the stocks discussed in this article.