Archies Ltd has disappointed and frustrated millions of its loyal shareholders for a whopping 23 years now. The stock hit a high of about 283 in 1999 and then dug a grave for itself as you can see in the monthly chart below.
Well, there’s good news for people who own the stock or new investors – the Archies’ stock may have risen from the grave and is likely to be nursed back to health. Here are the reasons why:
Archies’ Cost Cutting
The company is closing down loss-making stores and is diligently opening new ones. This exercise has helped Archies achieve a 39% growth in revenues in the year ended March 2022.
The positive impact of this plan on the company’s financials is building up nicely as is evident from its Q2 2023 results:
In Q2 2023, Archies reported sales of Rs 21.62 crores compared to Q2 2022 revenues of Rs 19.34 crores. Now, the cost of materials and goods purchased in Q2 2023 worked up to 41% of revenues, while the cost of the same items was 43.5% in Q2 2022. That’s a 2.5% savings in costs.
Second, the company’s other expenses, which are likely to include store rent and maintenance, fell from Rs 7.34 crores in Q2 2022 to Rs 5.84 crores in Q2 2023, resulting in a quarterly saving of Rs 1.5 crores, or about 7% on revenues.
So, going forward, I expect Archies to save about 9.5% of its revenues, which will nicely bump up its bottom line.
Archies’ Zero Debt Plan
Archies’ total debt, including long-, short-, lease liabilities, and other financial liabilities work out to about Rs 40 crores as of September 2022. The company’s interest payment works out to about Rs 1.6 crores every quarter, or say about Rs 6.4 crores every year.
Now, the company is making moves to become zero-debt by March 2023. It has already hired ICICI Bank to help raise funds for equity infusion.
The inference is that Archies is likely to save Rs 6.4 crores on interest expenses every year, which too will heavily boost its bottom line.
Note that the company is also selling off its land + unit at Manesar (Delhi NCR), and I guess that aside from using the proceeds to achieve the zero-debt goal, Archies may be planning something more significant.
Rapidly Evolving Business Mix
The company operates a paper bags vertical, which should do phenomenal business because countries are banning single-use plastics.
In Q2 2023, the company’s paper bag division contributed 38% to its total revenues but it had a high-profit margin of 22% before interest. As explained above, interest expense will be zero after March 2023.
The company has also installed a new paper bag-making machine in October 2022, and I reckon that the revenue of its paper bag business division is all set to increase manifold as nation after nation starts banning single-use plastic. Currently, the company derives about 10% of its revenues from exports, and this percentage is likely to jump over time.
Archies Is The Cheapest Platform Stock In India
Let’s not forget that Archies also operates a niche gifting and beauty e-commerce website, Archies Online. Aside from physical sales, the company also owns a platform and though the online shop has miles to go, I regard Archies as one of the cheapest platform stocks in India.
Forecasting Archies Net Profit in 2024
Assuming Archies keeps clocking the same revenues (Rs 21.62 crores) and net profit (Rs 1 crore) it registered in Q2 2023, here’s how its cost and interest reduction will help boost the bottom line:
Revenues Rs 86.50 crores
Net profit (before cost saving) = Rs 4 crores
Interest expense saved = Rs 6.4 crores
Other cost reduction measures = Rs 1 crore (on a conservative basis)
Estimated Net Profit in 2024 = Rs 11.4 crores
Equity = Rs 6.76 crores (FV 2), or 3.38 crore shares (not accounting for any growth or diversification whatsoever)
Archies Estimated EPS in 2024 = Rs 3.37
If you give it a PE multiple of 15x, the estimation is that Archies should zoom to Rs 50-60 by March 2024, at the latest. Maybe, speculative activity can take it higher.
As I’ve not accounted for any growth, I’m also not accounting for any increase in equity because I feel both will even out.
Based on my analysis, I strongly feel that Archies is a buy at the current CMP of Rs 26 for 1-2x gains by 2024, and multibagger gains in the long term (5+ years holding).
D: Long at 20 since February 2022.
Nice reaserch