How To Identify Turnaround Companies?

Investing in turnaround companies can yield substantial returns, but it demands in-depth sectoral knowledge, careful evaluation of fundamentals, and patience. By identifying genuine recovery stories early, investors can position themselves to reap long-term gains from these high-potential opportunities. The article presents two case-studies

The half-yearly results season for major listed companies has wrapped up, sparking keen interest among investors eager to identify businesses that have turned their fortunes around. While these turnaround stories hold immense potential, distinguishing genuine, sustainable recoveries from temporary blips requires a careful and comprehensive approach. One basic way to identify turnaround companies is by comparing their recent financial performance with the corresponding period from the previous year.

For example, if a company reported profits in H1FY25 after incurring losses in H1FY24, it may be considered a turnaround. However, this approach often identifies numerous companies, some of which may not sustain their newfound profitability. A deeper analysis is crucial, as profits can sometimes result from one-off events rather than core operational improvements. For instance, Paytm recently reported profits, but this was largely due to a one-time exceptional gain of ₹1,345 crore from selling its entertainment ticketing business. When adjusted for this, the company would have posted a loss of ₹400 crore.

To effectively identify sustainable turnarounds, it is essential to focus on companies that have reported profits after several quarters of continuous losses. Even so, investors must understand the reasons behind these recoveries to assess whether they are sustainable. Sectoral trends, operational efficiencies, and financial fundamentals must all be scrutinised. For example, wind energy companies have recently experienced improvements due to favourable policy shifts, making their recoveries more sustainable.

Valuation also plays a pivotal role in investing in turnaround stocks. The best returns are often realised when a company is still in losses but shows clear signs of recovery. Spotting such firms early allows investors to benefit from the price action that follows improved financial performance. However, this requires sectoral expertise, diligent tracking, and patience.

Turnaround Success Stories that are Sustainable

Inox Wind Ltd.
BSE Code : 539083
Face Value : ₹10
52-Week High / Low : ₹262.10/ ₹86.51
M-Cap Full (₹ Crore) : 27,073.28
CMP : ₹207.65

After struggling with losses for six years, Inox Wind reported its first profit in Q3FY24, driven by India’s increased focus on renewable energy. This turnaround is rooted in both robust demand for renewable energy and strategic financial decisions. The company faced significant challenges when India shifted from feed-in tariffs to competitive bidding in the wind energy sector in 2017. This regulatory change severely impacted demand, leading to an industry-wide crisis that reduced the number of players from 35 to just a few survivors.

Between 2017 and 2023, Inox Wind’s debt ballooned from ₹600 crore to ₹3,000 crore. However, a capital infusion of ₹900 crore by its promoter, Inox Wind Energy Limited, in July 2024 helped reduce its external term debt, strengthen the balance sheet, and lower interest costs. By September 2024, the company achieved a net cash position of ₹278 crore, with interest expenses sharply declining and forecasted to approach near-zero by Q4FY25.

In Q2FY25, Inox Wind achieved its best financial performance in the past eight years. The company reported consolidated revenue of ₹742 crore, a 93 per cent YoY increase, with EBITDA growing by 171 per cent to ₹189 crore. It posted a net profit of ₹90 crore, compared to a loss of ₹27 crore in the same period last year.

Outlook - Inox Wind now holds a record order book of 3.3 GW, including 1.2 GW of new orders in H1FY25. Management has reaffirmed its execution targets of 800 MW for FY25 and 1,200 MW for FY26, with potential for further growth. Its EBITDA margins are expected to improve to 17 per cent in FY25 due to backward integration, cessation of royalty payments for 3 MW turbines, and the launch of larger turbine blades.

The company is also investing ₹75 crore annually over the next two years to develop larger blade molds and support maintenance, enhancing cost efficiency and strengthening its competitive edge.

With a debt-free position, strong operational cash flows, and robust demand for renewable energy, Inox Wind is poised for sustained growth and long-term value creation.

Delhivery Ltd.
BSE Code : 543529
Face Value : ₹1
52-Week High / Low : ₹488.05 / ₹326
M-Cap Full (₹ Crore) : 26,197.14
CMP : ₹353.05

Delhivery posted its second consecutive quarter of profitability in Q2FY25, with an adjusted PAT of ₹10.2 crore compared to a loss of ₹102.9 crore in Q2FY24. This turnaround was primarily driven by strong performances in its part-truck load (PTL) and supply chain segments. The company’s PTL revenue grew by 27 per cent YoY, supported by a 23 per cent increase in volumes, while the supply chain segment posted 20 per cent growth. Its operational efficiency also improved, with EBITDA margins rising to 2.6 per cent.

The company’s PTL and express parcel services benefit from a robust, tech-enabled network that spans 18,000+ pin codes across India. This extensive reach, coupled with ongoing enhancements to its mesh network, ensures scalability and efficiency. Delhivery’s adaptability to market demands is a key differentiator, as evidenced by its foray into value-added services—including faster regional and national delivery, third-party shared quick commerce solutions, and tools tailored for SME clients.

Operational improvements were achieved through inventory adjustments, including a ₹21 crore reversal for previously imported oxygen concentrators, and better working capital management, which reduced the cycle from 27 days in March 2024 to 22 days in September 2024. Strategic investments also played a critical role in the turnaround, with the company allocating significant capital to expand PTL and express parcel capacities to meet seasonal demand. While these investments led to short-term margin pressures, they have created a foundation for long-term growth.

Outlook - Delhivery expects its EBITDA margins to rise from 1.6 per cent in FY24 to 8.1 per cent by FY27, alongside a revenue CAGR of 15 per cent. Strategically, the company’s emphasis on prudent financial management, such as reducing its cash conversion cycle and optimizing working capital, ensures it remains on a solid footing for sustained growth. These efforts, alongside significant investments in PTL and heavy freight capabilities, will support its long-term objectives. With a focus on innovation, expanding its footprint, and operational excellence, Delhivery is well-positioned to capitalize on India’s growing e-commerce and logistics demand, solidifying its leadership in the industry.

Conclusion
While turnaround stocks offer significant potential, not all recoveries are sustainable. Dish TV, for example, was widely expected to recover but has continued to report losses. This underscores the importance of thorough research and constant monitoring. Investors must understand the factors driving a company’s turnaround and remain vigilant for any signs of a relapse. Investing in turnaround companies can yield substantial returns, but it demands in-depth sectoral knowledge, careful evaluation of fundamentals, and patience. By identifying genuine recovery stories early, investors can position themselves to reap long-term gains from these high-potential opportunities.