Our key objective is to pick stocks which can compound sustainably at a healthyrate for the next 3-5 years and create wealth.We like to select companies with strongcompetitive advantages and are quoting at a discount to their intrinsic value.Our key objective is to pick stocks which can compound sustainably at a healthyrate for the next 3-5 years and create wealth.We like to select companies with strongcompetitive advantages and are quoting at a discount to their intrinsic value.‘s (SIP) - Best Way to Grow your wealthStock Recommendation for the month of July’12Stock Recommendation for the month of July’12
Kewal Kiran Clothing Ltd (KKCL)- A Bet on Increasing Middle-Class Spending
Kewal Kiran Clothing Ltd – Investment Snapshot(as on July 20, 2012)Recommendation :- BUYAccumulation Range :- 450-550• Invest 35% of Investment allocation at thecurrent Price.• Have enough Cash to average down over thenext 6 Months Time-frame.Current Market Price – Rs. 538Bloomberg / Reuters Code – KEKC IN/ KKCL.NSKewal Kiran was established as a Partnership firm in 1980by four brothers. KKCL is promoted by Mr. Kewalchand Jainand supported by his brothers Mr. Hemant Jain, Mr. DineshJain and Mr. Vikas Jain.Kewal Kiran Clothing Limited (KKCL) is a leadingmanufacturer, retailer of branded apparels and fashion-wear in India. KKCL is widely known for its Flagship, “Killer”brand of Jeans.KKCL has over two decades of experience in the domesticBSE / NSE Code – 532732 / KKCLMkt Cap (INR BN / USD Mn) – 6.49 / 116.7[1 USD – Rs. 55.60]Total Equity Shares [Mn]– 12Face Value – Rs. 1052 Week High / Low – Rs. 875 / Rs. 525Promoter’s Holding – 51.58 %Institutional Holding – 35.82 %KKCL has over two decades of experience in the domesticreadymade garments industry with some leading brandslike ‘Killer’, ‘Lawman Pg3’, ‘Integriti’, ‘Easies’ and‘ADDICTIONS’ across various product segments.KKCL has a very strong positioning in the Indian Jeansmarket. It also has a formidable presence in Trousers,Shirts, T-shirts & Jackets segments and an emergingpresence in lifestyle accessories.Company raised around 72 Cr Rs through its IPO in 2006which was well received by the Market. The issue gotoversubscribed by over 12 times.“ Specialists in discovering Multibagger stocks “
Key Investment HighlightsStructural Growth Opportunities – Kewal Kiran has a lot of Macro positives going in favor of it in the Longterm. It is present in a country which is undergoing a major economic expansion, huge Youth Population,Value Conscious society and Increasing spending on Apparels. Kewal Kiran with a strong operationalpresence is well positioned to reap the benefits of these Structural Growth opportunities.Strong Business Model – Kewal Kiran has an Asset light Business model which gives it tremendousadvantage over most of its peers. KKCL’s retail stores are mostly Franchisee owned and operated, which hasreduced the Capital requirements of KKCL. Kewal Kiran also outsources the basic Manufacturing processwhich helps it to control costs without increasing Fixed costs. Company’s designing, manufacturing,marketing to retailing helps it to have a Vertically integrated model which gives a lot of Operational levers.Robust Financials – Kewal Kiran is a Zero Debt company with a robust balance sheet. Company has one ofthe best Working Capital cycles in the Industry which has helped it to perform far better than all itscompetitors in the present tough scenario. The company also has a strong control on its costs which can becompetitors in the present tough scenario. The company also has a strong control on its costs which can beseen from the superior margins which the company generates.Experienced and Rational Management – Killer is one of the Few Home grown brands which have tackledGlobal brands well. It has been able to create a separate positioning for itself and distinguish itself amongstseveral other brands in the market. Company’s management has shown the ability to create and nurturenew brands which is a Huge asset for the company. Management has also been rational in their expansionplans unlike several other companies which went overboard and are feeling the heat now.Decent Valuations – KKCL in spite of its Healthy fundamentals, Relatively resilient Business model andsuperior growth opportunities, is available at decent valuations. KKCL at the current price is quoting at lessthan 10X its FY-14 earnings. Present prices provides a good opportunity for Long term investors toaccumulate the Stock at attractive prices.“ Specialists in discovering Multibagger stocks “
Industry Opportunity & Potential- An Overview- An Overview“ Specialists in discovering Multibagger stocks “
Strong Structural Trends• Anyone who is observing the transformation India is undergoing will be able to point these 4 Structuraltrends which are gaining strength.trends which are gaining strength.1.) Great Middle Class boom. (A Middle Class population greater than population of many Countries)2.) Rising Youth Spending. ( Huge Youth population with higher discretionary spending )3.) Value Conscious Indian Market. ( Consumers who are most demanding and looking for bargains )4.) Increasing aspirations of Tier-2 and 3 towns of India. ( Improved exposure and affluence in Indian towns )• The biggest transformation is happening at the bottom of the pyramid with a massive inflow of newconsumer’s spending on discretionary items like Branded Apparels, QSF spends, Entertainment, Electronicproducts etc. This can be seen from the inflow of several Global brands wanting to target this segment.• Indian Youth population is bulging and this demographic advantage is in the backdrop of a Ageing World,which is making India one of the Hot Bed of consumerism. Social changes are also driving consumption.“ Specialists in discovering Multibagger stocks “
Indian Fashion Apparel Market• The Social change is happening in India, with Increasing fashion conscious people especially amongst theIndian Youth on an averagespend 40% of their Income onApparel, compared with 15% bythe previous generation.“ Specialists in discovering Multibagger stocks “• The Social change is happening in India, with Increasing fashion conscious people especially amongst theCountry’s youth population. The younger generation spend a lot more on Apparels compared with theirprevious generation. In fact over 40% of their discretionary spending is being done on Clothes andAccessories which is making India attractive for many of the Global Brands to set up their own shop here.• Per Capital expenditure on clothing is also raising in tandem with the increase in Per Capital Income, whichis a clear sign of good times ahead for the Fashion Apparel market. Indian Fashion market is still pretty muchunder developed when compared with the Western countries which provides huge potential. There is a hugepotential for the growth of niche and new segments within the Apparel space.• The growth has been spread across segments of the Apparel Market. Jeans, T-Shirts, Shirts and otherAccessories continue to grow at a good rate. The growth is actually expected to accelerate over the next 5Years compared with the previous 5-Year period.
Huge Growth Opportunities• Indian retail sector is still largely unorganized with theorganized players contributing to less than 13% of theoverall market. Both the organized and un-organized tradehas been growing at a healthy pace.• Organized retail industry is expected to grow faster thanthe unorganized players and the shift will accelerate in thenext few years. The composition is expected to change to60:40 for Unorganized: Organized retail.• Indian Apparel market is expected to grow at over 11%CAGR over the next 10 years which is very healthy andCAGR over the next 10 years which is very healthy andOrganized retailers can be expected to grow at over 16%CAGR in the same period.• This growth comprises of an equal amount of Volume andValue growth which in turn helps strong brands to maintaintheir margins and grow profitably.• The Opportunity for different stakeholders like Fashionretailers, Apparel Manufacturers and Brands are presentand companies with strong competitive advantages will beable to capitalize on these opportunities.“ Specialists in discovering Multibagger stocks “
Industry Scenario• Indian Apparel retailers have been going through a phase of significant pain. There has been severaltroubled retailers over the past 3 years. The major reasons being,TroubledRetailers• Koutons Retail• Lilliput Kids• Vishal Retail• Giny & Jony• Spykar Retail1.) Reckless expansion during the Boom time.2.) Huge Debt burdened balance sheets.3.) Cash Flow problems erupting out of longer Working Capital cycles.4.) High Rental costs coupled with significant CAPEX for new stores.5.) Inventory losses (or) Poor Management.6.) Lower margins due to competition and escalating costs.• Even the Apparel manufacturers have seen some testing times with huge volatility in Cotton raw materialprices and Currency movements. This has led to depressed earnings. Most of the apparel companies have avery low PAT margin and Return ratios. Their business model continues to rely on several Macro variableswhich are not under the control of Management leading to regular earning volatility and poor cash flow.“ Specialists in discovering Multibagger stocks “
Kewal Kiran – Business Overview“ Specialists in discovering Multibagger stocks “
Key HighlightsKKCL has been expanding its retailpresence in a calculated manner withregular closing down of non-performingstores. This has enabled it to haveprofitable stores and be aggressive in itsexpansion plans.Pragmatic Retail ExpansionKKCL has a good portfolio ofbrands straddling across the mid-end of the fashion pyramid. Itsbrands are well established andare “Value for Money”.Attractive BrandsKKCL has zero debt on its balancesheet boosted by its strong WorkingCapital management.Kewal Kiran has been able tomaintain its raw material days at 26which is great compared with overHealthy CapitalStructureKewal Kiran(KKCL) are “Value for Money”.KKCL has a very strong distributionnetwork with over 3000+ MBO’s and 100+distributors. It has a very significant firstmover advantage in Tier-2 and 3 towns.KKCL also has other distribution channelslike exclusive outlets, Franchise stores andOrganized retailers.Strong DistributionKKCL has aggressive growth targets withan aim to reach 1000 Cr revenue by 2015-16 which is >3X growth from FY-12.Considering KKCL’s business model, thisgrowth will be without Equity dilution orHuge Debt raising which will immenselyhelp higher Shareholder returns.Aggressive Growthwhich is great compared with over50 days of its peers.(KKCL)“ Specialists in discovering Multibagger stocks “
KKCL – In-House Brands“ Specialists in discovering Multibagger stocks “• KKCL’s management has a good history of creating and nurturing new Brands at regular intervals. Thecompany currently has 5 different brands all of which are in-house with a clear positioning to cater todifferent segments of customers.• Killer continues to be the company’s largest brand and commands a good brand recall amongst itscustomer set. Killer used to dominate KKCL’s earnings a few years back. But with the growth of new brands,KKCL has been able to moderately de-risk itself from a single brand.• Company’s latest brand “Addictions” focuses on new growing accessory segments like footwear, belts etc.This brand is similar to the Hugely successful “Fast Track” brand from Titan Industries. KKCL has been able toscale up its revenues in this segment to 7% of its overall revenues in a very short period of time. Themanagement expects this is grow faster and reach over 10% of its overall revenues.
Product Positioning• Kewal Kiran has continuedto position its products as,“Value for Money” which ishugely attractive for IndianMiddle class buyers.• Company’s products aim toprovide the same quality anddesign of jeans as comparedto the Global brands but at acheaper price.• The Mass market is highlyfragmented with numerousfragmented with numerousbrands and Killer has beenable to position itself well.“ Specialists in discovering Multibagger stocks “• Though the Volume growth of Mass market is high, the value growth is pretty much lower and Brandaffinity is low when compared with the premium segment. So with increasing affluence, Customers tend tomove up the value chain to new Brands.• Most of KKCL’s customers are people who aspire to wear Branded goods and Killer has been able to caterto this segment of clients with its innovative brand building and continuous marketing efforts.• This Mass market segment has started to attract the biggies and Levi’s has come out with its “dENIZEN”brand targeting this segment. One can expect more such initiatives as it’s the Mass market that helps acompany to build manufacturing scale, higher volumes and Distribution strength across India.
Strong GrowthKKCLBrand Growth• Kewal Kiran has been able to grow all its brands at above market growth rates with the exception of its“Easies” brand. There has been a decline in the growth of Easies brand which is mainly due to theManagement’s non-focus on it.• KKCL’s 23-year old Flagship brand, “Killer” has been able to grow at a healthy 20% in spite of its higherbase. Lawman Pg3 has been the fastest growing and Integriti has maintained a healthy CAGR of 21%. Withthe addition of Addictions, we expect it to become the fastest growing brand.• KKCL has been constantly leveraging its brands to come out with new set of extensions. Its Killer brand wasextended to Women wear through “Killer for Her” range in 2007. Similarly the company has beenconsistently coming out with new ranges like “Integriti Galz”, “Yi-Fi”, “Emboss” etc.“ Specialists in discovering Multibagger stocks “
Healthy Margins• KKCL enjoys lower rawmaterial costs which stemsfrom established relationshipwith suppliers of denim fabricfor over two decades and thebargaining power it enjoysowing to brand strength.• KKCL has been able tomaintain its Selling, Generaland Administration costs in anarrow band of 10-15% overthe past 7 years leading to“ Specialists in discovering Multibagger stocks “• Kewal Kiran has seen tremendous pressure on its Margins because of increasing Raw material prices overthe past year and increased Excise duty in 2012. The company was able to pass only a partial increase incosts and had to improve efficiencies in order to reduce its margin erosion.• Company’s relatively higher EBIDTA margins also directly co-relates with its Higher Gross Marginscompared with its peers. This is mainly due to KKCL’s superior business model which allows it to enjoy thebenefits of Integration without the Overheads associated with it.• Company’s margin will continue to be under pressure because of the completion of Sales tax exemptions of(VAT – 4%/ CST – 2%) by 2013. This increase can’t be passed onto consumers considering the weak demandand also scope for improving further efficiencies seem to be limited, unless there are reforms like GST.the past 7 years leading tostable margins overall.
Strong Distribution Channel• Kewal Kiran’s biggest strength has been its Strong Distribution network across the country. KKCL hasvarious forms of distribution like Multi-Brand Outlets, Exclusive Retail Stores (K-Longue, Killer Stores) andNational Chain stores like Shoppers Stop and Pantaloons.• KKCL’s distribution, product and Geographical mix is pretty much diversified and hence there is no hugeconcentration risk on any of these. KKCL uses its MBO’s to reach its target customers in Tier-2 & 3 towns,Retail stores for Exclusivity & better Margins and National Chain for Visibility & Branding.• It is KKCL’s huge MBO strength that helps in reaching its Target customers and build the “Value for Money”brand. Company has over 3000 retailers and 100+ distributors which helps it penetrate across India. In mostof these markets, KKCL has a significant First Mover advantage and established brand which will help it tofend off competition from new brands like “dENIZEN”.“ Specialists in discovering Multibagger stocks “
Strong Retail Expansion• KKCL has been increasing its own Retail stores undervarious formats (K-Longue, EBO’s) aggressively over thepast few years. This helps the company to stay in touchRetail StoresRevenuespast few years. This helps the company to stay in touchwith its customers and manage its production well.• We expect the company to grow its Store count at over15-20% range which will help it to grow its revenues,Customer Reach and Brand value consistently.• The company is focusing on expanding its retail outletsand has appointed master stockist for specific regions.The master stockist is responsible for the supply of stockto the franchisees operating in the region, along withadditional responsibilities of advertising and promotionof the company’s products.“ Specialists in discovering Multibagger stocks “
Investment Rationale“ Specialists in discovering Multibagger stocks “
Differentiated Business Model“ Specialists in discovering Multibagger stocks “• KKCL has a differentiated Business model when compared with its peers which is leading to superiorfinancial performance. KKCL has a flexible and asset light business model in spite of being an integratedplayer. Two major differences are its Higher Outsourced Manufacturing and Strong Retail Franchisee.• KKCL has over the years consistently increased the outsourcing of commoditized hand jobs in ApparelManufacturing which has helped it to have a variable cost structure and scale up faster. This has helped KKCLto have a steady margins compared with the High Cost and Volatile margins of its peers.
Asset Light Business Expansion• KKCL unlike other Retailers have been closing itsloss making stores regularly which has helped it tohave a tight control over its profits. Managementhas been highly rational in their store expansionplans and grown it steadily.“ Specialists in discovering Multibagger stocks “• Most of KKCL’s retail expansion has been through its FOFO (Franchisee Owned and Franchisee Operated)stores. Thus the company doesn’t need any capital to grow its network and there is a virtuous cyclebetween the growth of the brand and expansion of new stores. Each positively affects the other.• KKCL will continue to open most of its stores through Franchisee route. These retail stores not only provideadditional sales points but also boost revenues through inventory build-up. Since the company supplies itsproducts on an outright sale basis, it has minimal risk in case of unsold inventory.• KKCL works on a “Outright Sales model” compared to its peers which work on “Consignment Model”. Inthe consignment model, apparel manufacturer needs to take back the unsold inventory which leads tohigher working capital and inventory losses. But in Outright sales model, manufacturer doesn’t take unsoldgoods – but shares a part of the value loss with the retailer.
Long Term Positives• Owing to these superior business model of higheroutsourcing, increased retail presence and Outright sales“ Specialists in discovering Multibagger stocks “outsourcing, increased retail presence and Outright salesmodel – KKCL has been able to work with zero debt and thebest working capital cycle in the Industry.• KKCL has been able to plan its manufacturing and retailingwhich helps it to have a shorter production cycle and bettercost structure. All these lead to higher margins, lower debts,better debtor days and large profits compared with peers.• KKCL having its in-house brands doesn’t have any royalty costs and whatever it spends on Advertisementsis actually a future Investment in the business. Understanding the value of a stronger brand and the need forinvesting in it, KKCL has been amongst the top Ad spenders in its peer group. More importantly, thecompany has been able to come out very innovative ads which serves the purpose of brand building.
Strong Financial Management• KKCL has been consistently having a strong growth rate and finances which can be seen from its 5-YearFinancial history. Except for 2008-09 when the world economy went into a tailspin and there were lot ofdomestic headwinds, company has been able to improve its revenues and profitability consistently.• Company with its asset light business model, generates over 6.5X revenues on its fixed assets which is avery positive number. This helps the company to have a high return on capital employed and high ROE.Company will continue to grow without dilution or excessive debts and hence there is very little balancesheet risk in Kewal Kiran.• Management has been very rational and pragmatic in their business operations. All 4 brothers have a cleardemarcation in their roles and responsibilities in the organization. This entrepreneurial and hands onmanagement is a very big positive for Kewal Kiran.“ Specialists in discovering Multibagger stocks “
Future Growth Plans“ Specialists in discovering Multibagger stocks “• With the demand slowing down due to inflationary concerns and lower discretionary income, the revenueand volume growth will taper off for the next 2 years. But this is a temporary blip in the high growthtrajectory which the company is expected to witness over the next decade.• Positives with GST Implementation :- Proposed goods and services tax (GST) can provide further fillip toorganized retail growth by reducing complexities of doing business, improving efficiencies across the supplychain and optimizing the taxation system of the country. Currently organized retailers pay value added tax(VAT: 5% to 12.5%), Service tax (10.3%), Central Sales tax (2%) and local octroi taxes which is generallyevaded by the unorganized players.GST will help the organized players have a level playing field and improve the Logistics costs enabling, theOrganized chains and manufacturers to scale up quickly.
Huge Relative Outperformance• All the above mentioned positives can be easily verified by the superior performance of KKCL with respectto all its peer companies. This gives us much more confidence on the Business model of the company and“ Specialists in discovering Multibagger stocks “to all its peer companies. This gives us much more confidence on the Business model of the company andthe future shareholders potential.• Textile manufacturers or Fashion retailers always have a demand for their products, but most of thesecompanies have problems in their cost structure and margins. With a currency which swings heavily, rawmaterial prices which are unpredictable, policies which are uncertain and demand which can’t be gauged –most of these companies have a lot of problems in the P&L statement due to elongated working capital cycleand inflexible production cycles.• KKCL has been able to establish itself as a bottom-line driven company with its differentiated businessmodel which has hugely benefited its P&L statement and provides a lot of certainty. In spite of thesepositives, we don’t we feel that the company is receiving the premium it deserves to be traded over andabove its peer companies.
Financials“ Specialists in discovering Multibagger stocks “
Earnings ProjectionIncome Statement (INR Cr) FY 11 FY 12 FY 13E FY 14EOperating Income 236.5 301.9 355.4 424EBIDTA 68.9 73.4 80 96Depreciation 5.9 6.2 7.5 9.0EBIT 63 67.1 72.5 87Interest Expenses 2.1 2.6 3.0 3.0Other Income 8.3 11.8 12.6 15.2PBT 69.3 76.3 82.1 99.2• Our assumptions in thisProjections will improve a lot, ifwe signs of the economyreviving in the second half ofthis Fiscal or early next year.• We expect Margincompression to continue thisyear on account of thechallenging Macro environmentand cost pressures.PBT 69.3 76.3 82.1 99.2Tax 22.86 25.17 26.27 31.74PAT 46.2 52.1 55.83 67.46EPS 37.5 42.3 45.23 54.72Dividend per Share 16.5 17 17.1 17.8ROE 24.6% 24.7% 22% 24%ROIC 55.3% 52% 43% 51%• We expect the return ratios torebound significantly in FY-14.ROE’s and ROIC’s will continue tobe much higher than its peers.• KKCL’s return ratios, marginsand high capital asset turnovercombines to make a clear casefor a strong re-rating in itsvaluation over a period of time.Specialists in discovering Multibagger stocks “
Concerns & Reasoning1.) Cost Pressures :Kewal Kiran doesn’t have enough Pricing power to pass on all its cost increases. This is easily visible in thedecreased Margins during, periods of high Cotton Prices. Also other costs like Excise duty increase takes atoll on the Company’s profitability. While this is a valid concern, we think KKCL with its Robust Businessmodel is positioned far better than its peers to manage such difficult environments.2.) Increased Competition from Foreign Brands :With the Opening of 100% FDI in Single brand retail, Indian Fashion Apparel market is expected to see aninflow of several Global brands and thereby increasing the Competitive intensity. But, KKCL being a ValueBrand will be able to manage this onslaught of Foreign Brands. KKCL creating a niche for itself among strongBrands like Arrow, Lee, Levi’s and Wrangler gives us the confidence.“ Specialists in discovering Multibagger stocks “3.) Changing Fashion Trends :Fashion trends keep on changing and get obsolete in a short span of time. This is a real risk in Fashionretailers and Investors need to keep a watch on the new trends. With lot of experience in this Industry,KKCL’s management will be able to mould the company according to the latest trends. The company has astrong ear to the ground and flexible enough to change itself accordingly.4.) Margin Compression Continues :KKCL’s product mix has been shifting to low margin products. Also higher rental costs have taken a toll on itsMargins. Until demand is robust, KKCL will find tough to improve on its Margins. But the company hasenough Operational levers to maintain the existing Margins. Even though Margins may contract in thefuture, we expect the company’s High ROE to maintained.
Conclusion“ Specialists in discovering Multibagger stocks “
Price ChartKKCL’s share price has recovered strongly from the 2009• KKCL’s share price has recovered strongly from the 2009crash and is currently quoting at much higher levels. Therebound was very strong.• Share has been on a correction mode for the past 10months which is providing attractive opportunities. If theshare corrects more than 20% from the current levels, itwill attract several long term investors.• KKCL’s promoters holding has been high at 74% and hasbeen maintained there consistently. There is a decentInstitutional holding leaving no more than 10% float in thehands of retail investors.“ Specialists in discovering Multibagger stocks “ShareHolding %Mar2012Dec2011Sep2011June2011Promoters 74.06 74.06 74.06 74.06FII 12.08 12.11 12.39 12.08DII 4.99 5.01 4.07 3.88
ConclusionThere has been a Huge Polarization in Indian markets over the past 2 years. Domestic Consumptionbased shares at trading at very high P/E multiples (25-30X Earnings), whereas Infrastructure, Investments orManufacturing related companies have been beaten down severely and quoting at very low P/E Multiples.Everyone accepts that Indian Secular growth story is still strong and the opportunity for well run consumerfocused companies in India is very high. But, its difficult to earn strong returns – If you are buying an alreadyfairly valued share. Any appreciation is possible only on the basis of earnings growth and the risk of de-ratingerases the Margin of Safety in the stock.But here we have a company which is highly efficient with a Robust business model, Domesticconsumption stock, Strong Return parameters, Good Management and still Quoting at attractive Valuations.KKCL in no way can be classified as a Tier-2 Consumption stock, as its Financials are comparable with theMarquee names. The stock has the double booster of Strong Earnings growth in the coming years combinedwith a Potential P/E re-rating, which makes it a strong candidate for generating Multi-bagger returns.with a Potential P/E re-rating, which makes it a strong candidate for generating Multi-bagger returns.Kewal Kiran with its strong Base built over 20 years, is well positioned to reach its ambitious Revenuetarget of 1000 Cr by 2015-16. Even if the company’s management is able to achieve 70% of its growthtargets, the Share will be at much higher levels when compared with the current prices. Moreover, we feelthat the Quality of Kewal Kiran’s growth with sustainable margins is highly attractive.Kewal Kiran at the Present price quotes around 11X its one-year forward earnings, which is attractivefor a company which generates greater than 24% ROE and 30% ROCE. More importantly, KKCL has a lot offactors to maintain such high Return ratios and also improve on it during Good Environment. This providesa strong case of Re-rating of the stock. Investors are advised to take a small exposure to the stock atcurrent levels and accumulate it over the next few months, to generate strong compounded returns overthe next 3-5 Year time frame.“ Specialists in discovering Multibagger stocks “
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THANK YOU“ Specialists in discovering Multibagger stocks “