I’ve been observing the fall in Kotyark industries for quiet a while now. And the fall has been pretty brutal. The stock reached its all time high on March 2nd, 2024. The trend has been downward since then. The stock has erased almost half of its market cap since then and is down 48% from its lifetime highs. But such a downtrend isn’t totally unexpected after a stock rises 30x from its listing price.
What does the company do?
The company is primarily engaged in production of biodiesel and its by products – most significantly glycerin.
Biodiesel: Biodiesel is a renewable, biodegradable fuel made from animal fat, vegetable oil, restaurant food waste etc. Basically, you mix the raw materials (animal fat, vegetable oil, restaurant food waste etc.) with alcohol (usually methanol) in the presence of a catalyst (NaOH). This converts the raw materials into biodiesel and glycol. The biodiesel and glycol are then separated.
Biodiesel is made from raw materials that can be replenished by nature. It is biodegradable in the sense that it is easily broken down by nature and it does not linger on in the environment. So it is a cleaner alternative to petroleum diesel.
Kotyark Industries produces Pure Biodiesel which is compatible with diesel engines.
Glycerin: The glycol produced in the production of biodiesel is further processed to make glycerin which finds wide usages in food, pharma and cosmetics industries.
What led to 30x rise in stock price for Kotyark Industries?
National Policy on Biofuels (2018) targets 5% biodiesel blending by 2030. The policy aims to penalize oil companies that fail to meet the norm. This led to a sudden surge in demand for biofuels and company started to get heavy orders on the back of it. The stock market was quick to price this in.
What has led to the 48% fall?
- Government aiming to move away from diesel vehicles, even threatening the owners of diesel vehicles.
- Normal course correction after a 3000% upmove.
- Weaker support from institutional investors in the stock market at large that has led to a 36% median fall in the stock price in the micro-cap universe.
- Weak March 2024 results.
Is it a falling knife? Or is it poised for reversal?
No one knows for certain.
We have to look at both sides of the coin.
Arguments for reversal:
- Growing demand for biodiesel: Government has been promoting biodiesel as an alternative, cleaner source of energy.
- Strong financial performance: Kotyark Industries has registered strong financial performance in the recent years.
- Strong order book of ₹600crores. It recently received orders to supply 48,381 KL of biodiesel to IOCL, BPCL and HPCL.
- History of good execution.
Arguments for a falling knife:
- Government’s intent to move away from diesel vehicles. In such a scenario, Kotyark industries would have to look at other industries to find application for its biodiesel.
- Rising debt.
- Promoter holding has been reducing since listing.
- Increasing competition as the barriers for entry are low.
- Company hasn’t been able to generate cash, that could be one of the reasons for rising debt.
Conclusion:
The government’s thrust for cleaner sources of fuel might push the stock up. But will biodiesel figure prominently in that fuel list is a question that stays unanswered as of yet. For now, the 48% fall seems to have priced in the weaker cues going into the future. Will it arrest the fall in the stock price? Only time can answer. Risk takers can take a small position in the stock and play it as the future rolls on.
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