Under the radar smallcap stock turns multibagger in 5 weeks

The Budget did not spark any significant excitement in the market as the government measures were populist and prudent.

The increase in short-term and long-term capital gains taxes added to the volatility. During the week, as many as 132 small-cap stocks delivered double-digit weekly returns, with eight of them offering over 25% returns.

Despite the volatility induced by the budget, the market has now recovered its losses, driven by positive US GDP data and expectations of improved global demand.

Additionally, global economic updates, including US Federal Reserve and Bank of England monetary policies, US employment data, and Eurozone GDP figures, are expected to impact market trends.

Amid this, shares of Reliance group's Lotus Chocolate have rallied significantly, surging 52% in the last nine days and a remarkable 150% over the past five weeks.

Before we examine the factors fuelling the rally, let's first understand Reliance's involvement with Lotus.

How is Reliance involved with Lotus?

Reliance Industries, through its subsidiary Reliance Consumer Products Limited (RCPL), acquired a majority stake of 51% in Lotus Chocolate Company in May 2023.

This strategic move marked RIL's entry into the FMCG sector and aligns with its expansion plans in South India.

The acquisition, valued at ₹74 crore also involved an additional investment of ₹20 crore in Lotus Chocolate's non-convertible debentures.

This partnership aims to leverage RIL's resources and distribution network to bolster Lotus Chocolate's brand and expand its market reach across India.

With this explanation covered, let’s now explore what is driving the rally in Lotus Chocolate.

#1 Robust Q1 results

Shares of Lotus Chocolate Company have been locked in the upper circuit for the eighth consecutive trading day, reflecting strong investor confidence.

The trading volume has surged dramatically, with as many as 120,000 shares changing hands, compared to fewer than 10,000 shares traded in the previous two weeks on the BSE.

Additionally, there are pending buy orders for 11,970 shares, according to market data.

This sharp uptrend is fuelled by the company's impressive earnings performance.

For the June 2024 quarter, Lotus Chocolate reported a staggering 337.4% year-on-year rise in revenue, reaching ₹141.31 crore, up from ₹32.31 crore in the June 2023 quarter.

The company's EBITDA also showed remarkable growth, standing at ₹11.27 crore in June 2024, a substantial increase of 1,582.1% from ₹67 lakh in the same quarter last year.

Furthermore, the net profit for the quarter soared to ₹9.41 crore, representing an extraordinary 4,698.45% increase from the ₹20 lakh reported a year earlier.

This robust financial performance underscores the company's strong operational capabilities and effective strategic initiatives, driving significant investor interest and contributing to the impressive rally in its share price.

#2 Reduction in global cocoa prices

Cocoa prices, which had peaked at ₹320 per kg for wet cocoa beans and ₹960 per kg for dry beans in the first week of May, have recently started to decline in the international market.

On 29 July 2024, cocoa futures fell to their lowest level in over four months, as traders anticipated an improved supply in the upcoming season and considered the potential for weaker demand.

The most active contract fell as much as 4.4% to US$ 6,650 a ton in New York.

This decline in cocoa prices comes after a sustained period of elevated prices, which has led to concerns about demand and the possibility of a slowdown in cocoa grindings.

This recent decline in cocoa prices offers a glimmer of hope for chocolate manufacturers. With input costs easing, companies can expect improved profit margins.

This positive outlook is likely to boost investor confidence in the chocolate sector, including Lotus Chocolate.

Additionally, if Lotus Chocolate can effectively manage its cocoa supply chain and procure beans at competitive prices, it could gain a significant advantage over its competitors.

These factors combined may have contributed to the stock's remarkable performance.

What next?

The company said the Indian confectionery industry has a long runway for growth driven by the secular trends of increasing demand for quality content and higher time spent across demographics on content consumption.

The increasing urban population is driving demand for modern and packaged confectionery products.

Further, busy lifestyles are leading to increased consumption of convenient and on-the-go snacks, including confectionery items.

Additionally, the expanding middle class is fuelling demand for premium and differentiated confectionery products.

However, the high prices could continue to impact demand, leading to reduced grindings.

Chocolate companies have already indicated that their margins might be under pressure in the second half of the year due to purchasing beans at these higher prices during the earlier rally.

How shares of Lotus Chocolate have performed recently

Over the past three months, Lotus Chocolate shares have increased by 166%, while they are up 258% so far in 2024.

In the past month, the stock has surged by 84%.

The company touched its 52-week high of ₹1,086.8 on 30 July 2024 and its 52-week low of ₹213 on 30 November 2023.

About Lotus Chocolate

Lotus Chocolate Company, a prominent player in the Indian confectionery market, has garnered attention for its diverse range of chocolate products.

The company has built a strong brand presence across the country.

Lotus Chocolate's product lineup includes a variety of chocolates and confectioneries catering to different consumer preferences.

The company focuses on using premium ingredients and maintaining high standards in production to ensure top-notch quality.

Its consumer products include brands, such as Chuckles, Superr Carr, On & On, Kajoos, Milky Punch, and Tango.

Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com