Thanks--On Sun, Jan 31, 2016 at 1:58 PM, Mihir Desai <desaimihir111@gmail.com> wrote:--
Apna Money
Investment Strategy The Tina factor There is no alternative to investing in small- and mid-cap stocks to make manifold gains. But which one?
Related Tables In the thick of action
There is no option but to invest in small- and mid-cap stocks if investors aspire to make manifold gains. However, this is not an easy task. There are several rags-to-riches stories in which investors could have participated. But this is nothing but hindsight wisdom.
At this point in time as well, there are several multi-baggers are in the making. But, again, how to spot them remains a big challenge. It requires solid research and higher risk appetite.
Look at these numbers. There are 3,040 small caps, with market value of less than Rs 1000 crore, and 454 mid caps, with market value greater than Rs 1000 crore but less than Rs 10000 crore. Firms with market cap higher than Rs 10000 crore are categorized as large caps. There are 144 large caps.
If companies with market cap of less than Rs 25 crore are removed from the fairly traded stocks, 1598 small-cap companies remain in the reckoning. This is a huge number to assess and study. One never knows which one will skyrocket and deliver mouth-watering gains in future. What investors can do is to keep navigating the world of small and mid-cap stocks for investment on a regular basis.
There are several approaches to pick potential winners in this space. Investors can scan annual reports, financial results and announcements and try to unearth the hidden gems. This stock-specific approach to investment is obviously painful and time consuming. This is certainly not everyone's cup of tea. Another way is to monitor news and developments. This can be company- or industry-specific events. These can act as triggers for small-cap stocks. Such episodes can even relate to policy or regulation.
Similarly, investors can run exhaustive queries on database to pick stocks for investment. For example, this can be based on growth stocks, i.e., stocks that have reported superior growth in profit and turnover. Also, they can focus on the quality of cash flows and balance-sheet strength while selecting companies. Return on equity, the ultimate guide to judge efficiency of the management in utilization of capital, can be the central theme while assessing small caps for investment.
Another way to look at the world of the small- and mid-cap counters is to pick and assess those where action is visible. Capital Market picked companies with market cap of less than Rs 2500 crore as on 20 January 2016 and those that had reported 52-week highs in the current calendar year. As the small-caps are defined as the ones with market value less than Rs 1000 crore and mid caps as having market value in the band of Rs 1000 crore and Rs 10000 crore, these select stocks run the entire gamut of small-cap stocks and the lower strata of mid-cap counters (Rs 1000 crore to Rs 2500 crore).
Next, only those companies that had some quantum of mutual fund investment end September 2015 were selected. Further, too tiny companies with market cap of less than Rs 100 crore were ignored.
Out of the remaining 233 stocks that emerged, only 20 stocks were shortlisted. These companies were selected based on various parameters. For instance, companies with robust growth in business in recent times and in the first half (H1) of the current fiscal ending 31 March 2016 (FY 2016) in particular were selected. There are multiple cases of H1 of FY 2016 net profit exceeding that of the entire FY 2015.
The net profit of Deccan Cements and Nilkamal in H1 of FY 2016 exceeded the net profit reported in the previous financial year. 8K Miles Software Services is another company with a significant jump in revenue and profit. Also, turnaround stories were picked. Nilkamal's retail store business reported a turnaround at the operating level in H1 of FY 2016, a big positive for the stock.
Companies with noteworthy revenue visibility were preferred. Firms with strong order book position included Skipper, KEI Industries, PNC Infratech, Power Mech Projects and Ahluwalia Contracts.
There are companies that have shared their long- and near-term business targets. The best part about such companies is that investors have a benchmark to assess their performance.
Further, companies that are undergoing corporate restructuring and are also on the northward journey on the trading floor were chosen. Triveni Engineering and Industries is in the process of hiving off and listing its loss-making sugar business.
There are several firms with ambitious expansion and investment plans that are underway or at the drawing-board stage. Also, companies that had recently finished their expansion plans were chosen. This revealed their business optimism in their businesses, probably the most important factor in equity investment.
There are companies that have reported peak performance in recent times. Such growth stories can only have upsides. Gulshan Polyols reported the highest quarterly turnover in the September 2015 quarter. Besides, firms with higher mutual fund stakes were handpicked. Next companies recording a decline in the debt-to-equity ratio and those expecting moderation in leverage were selected.
In all, these companies cover almost all colours and shades that could act as triggers for wealth creation. The bet is that these companies have seen some traction that has been appreciated by the market. This is manifested in the fact many of that these firms recently touched their 52-week highs or even multi-year highs. The BSE Small-cap index declined 12.4% and the BSE Midcap index 10.2% between 31 December 2015 and 21 January 2016. The recent correction can be an opportune time to pick winning stocks cheap.
Sarla Performance Fibers continues to focus on ramping up capacities. The manufacturer of specialized and high margin polyester yarn and nylon yarn is the only company in the country to manufacture Nylon 66, a high tenacity and low shrinkage product. Nylon 66 is used in products such as parachutes, shoes, seat belts, car airbags and sewing applications in automotive, shoes, leather, industrial filters and hoses. There is installed capacity of 450 tonnes per annum (tpa) at the Silvassa unit.
There are two manufacturing units at the Union Territories of Silvassa and Dadra and Nagar Haveli, with capacity of 11,900 tpa. The in-house dyeing capacity is 3,200 tpa at the Vapi facility in Gujarat. Exports contributed around 49% to the revenue in the fiscal ended March 2015 (FY 2015). The supplier to 116 customers in over 40 countries has long-standing relationships with leading global players such as Hanes brands, Gildan, Renfro, American & Efird, Delta Galil and Coats & Jockey. Also, there is aggregate wind power capacity of 7.25 MW.
The foray into the American partially oriented yarn (POY) market was by setting up a wholly owned subsidiary, Sarla Flex Inc, at South Carolina in the calendar year (CY) 2013. In the subsequent year, commercial production of POY started from a green-field plant. Now, the POY capacity is being increased to 18,000 tpa from 9,900 tpa, with capital outlay of US$ 11 million. The project is expected to be completed by CY 2017. The facility will cater to clients in the north, south and central American markets.
Mutual funds held 15.82% stake in the small cap end September 2015.
Nilkamal reported significant growth in the bottom line in the half year ended 30 September 2015. Indeed, the bottom line exceeded the profit for the entire fiscal ended March 2015 (FY 2015). Standalone profit was Rs 51 crore in H1 of FY 2016 compared with Rs 12.3 crore in H1 of FY 2015, a jump of over four times. Net profit was Rs 42.5 crore in FY 2015. The higher profitability was driven by decline in cost of raw materials, which was primarily due to decline crude oil prices. Lower finance cost and depreciation and amortization and increase in other income, too, aided profitability. Earnings per share (EPS) were Rs 34.21 in H1 of FY 2016 (Rs 8.2 in the previous period) compared with EPS of Rs 28.5 in FY 2015.
Operations are in three businesses of plastics, mattress and retail stores. In the plastic division, there is leadership position in the plastic furniture segment, with a market share of around 32%. Here, the distribution network consists of 40 depots and over 1,000 channel partners. Also, there is business partnership with various e-commerce portals to improve the sale of various value- added products. Going forward, the plastic division is expected to report a growth of 12-15%.
The retail store business, tagged as lifestyle furniture, furnishing and accessories division, with brand @home, has 19 large format retail stores spread across 13 cities and covering a retail space of 3.28 lakh square feet. This division is consolidating position in other channels of business such as institutional sales and e-commerce. Importantly, the retail stores division reported a turnaround at the operating level, with net profit of Rs 3.9 crore in H1 of FY 2016 as against loss of Rs 63 lakh in the previous period. The debt-to-equity ratio declined to 0.53 times in FY 2015 compared with 0.78 times in FY 2014 and 0.90 times in FY 2013. Mutual funds held 1.57% equity end September 2015.
With growth plans in place and favorable industry dynamics, Cosmo Films is a stock to watch out for. Capacity expansion is on cards due to the strong demand. The project will increase the capacity by 60,000 million tpa (mtpa), with 10.4-meter width biaxially-oriented polypropylene (BOPP) line. The new line will be among the lowest cost producing facility in the world. Financing is in place. The aggregate BOPP capacity will touch 1.96 lakh tpa from the current level of 1.36 lakh tpa by early CY 2017. BOPP is used in flexible packaging, adhesive tapes, labels and lamination applications.
The domestic BOPP industry has been growing at almost double the country's gross domestic product growth rate. Low packaged food penetration and rising personal disposable income are boons for the industry. Also, the growing organized retail industry and change in pack format from rigid to flexible is a giving boost to BOPP. Moreover, incremental supply is expected to exceed demand in future.
Established in 1981, the leading manufacturer of BOPP films is also the largest exporter of BOPP films and is the largest producer of thermal laminating films in the world, with plant-cum-distribution centers in the US, Korea and Japan and channel partners in over 50 countries. The product portfolio consists of BOPP (capacity 1.36 lakh tpa), thermal (40,000 tpa), coating (10,000 tpa) and metalizing (15,000 tpa). Leading clients include Britannia, Cadbury, Cipla, Colgate, ITC, Nestle, Unilever, Reckitt Benckiser and Pepsi among several others.
A high debt-to-equity ratio of 1.45 times end March 2015 is matter of concern. The stock reported an all-time high of Rs 318 in January 2016.
Skipper offers superior revenue visibility. An ambitious expansion plan to capture the favorable demand outlook is another pull. The two business segments are power transmission towers and distribution poles and water transmission pipes and fittings. The former contributed 90% of the revenues and the latter 7%. Established 1981, the one among the top three players in the transmission and distribution (T&D) infrastructure sector has an installed capacity of over 1.75 lakh tpa.
The engineering products order book position stood at around Rs 2400 crore end March 2015, providing revenue visibility of two years for the power transmission business. Overseas orders make up about 45%. Global presence spans across South America, Europe, Africa, Middle East, South and South-East Asia and Australia. The plan is to enter newer geographies to improve international penetration. Going forward, the target is to achieve a higher export share of 40% in total revenues.
The one among the top three PVC pipe manufacturing companies in the eastern region plans to build a national presence in coming years. The upcoming PVC pipe manufacturing facility at Sikandrabad near the National Capital Region (NCR) and Guwahati in Assam will increase the PVC products capacity to 40,000 tpa. There are plans to take the total capacity to one lakh tpa by FY 2018. At present, PVC capacity is 12,500 tpa.
Due to high leverage, the debt-to-equity ratio was xyz times and debt Rs xyz crore end March 2015. However, considering the growth prospects and operational and financial performance, external credit rating was upgraded two notches from A- to A+ by rating agency Credit Analysis and Research. Despite the robust 29% jump in net sales to Rs 578 crore in H1 of FY 2016, net profit declined 3.7% to Rs 40.3 crore. Mutual funds held a negligible equity stake of 0.02% end September 2015.
APL Apollo Tubes aims to augment production capacity to 2.5 mtpa by FY 2020 from the current 1.05 mtpa. There is confidence of grabbing market share from the unorganized segment in a commoditized market. Further, there is optimism owing to increased household income and infrastructure spending. The largest producer of electric resistance welded steel tubes in the domestic market has six manufacturing facilities located at Sikandarabad in Uttar Pradesh, Hosur in Tamil Naud, Bangalore in Karnataka and Murbad in Maharashtra. The product portfolio includes over 300 varieties of mild steel black pipes, galvanized tubes, pre galvanized tubes and hollow sections. Products are mainly marketed in tier II and tier III cities through a network of around 300 dealers.
To expand capacity, orders have been placed for five lines of ??HSU tube mill. The news lines are likely to be delivered by around September 2016. Also, there are plans to put up green-field projects of approximately one to 1.2 lakh tpa each in eastern India and Middle East. The capital cost of Rs 100 crore for the two plants will be funded through internal accruals and non-convertible debentures.
Exports are going to be the thrust area as a latent demand exists for ERW pipes in the Middle East, North Africa and Europe. The upcoming Dubai plant will serve as the production hub for exports. Currently, exports account for an insignificant portion of the total revenues.
Revenues of Rs 5997.6 crore and volume of 1.2 lakh tpa are expected in FY 2018 as against revenues of Rs 3357.2 crore and volume of 7.01 lakh tpa in FY 2015.
Owing to decline in the price of steel, inventory loss of Rs 34.5 crore was booked in H1 of FY 2016. The swing in prices of steel is the key concern. Mutual funds controlled 16.48% stake in the mid cap end September 2015.
Triveni Engineering and Industries (Triveni Engineering) is undergoing a major restructuring that could emerge as a milestone in the corporate journey. The board of directors in July 2015 approved the composite scheme of arrangement between Triveni Engineering and Triveni Sugar (TSL) and Triveni Industries (TIL) and their respective shareholders and creditors.
The sugar business of Triveni Engineering comprising five sugar plants situated at Sabitgarh, Chandanpur, Rani Nangal, Milaknarayanpur and Ramkola in Uttar Pradesh (UP) will be transferred into a 99.99% subsidiary TSL including all related assets and liabilities from 1 July 2015. The consideration for the transfer will be discharged by TSL by issuance of equity shares to Triveni Engineering.
In the second leg of the restructuring, Triveni Engineering's other sugar plants located in UP, comprising units at Khatauli and Deoband, along with the cogeneration facilities, distillery situated at Muzaffarnagar and related investments including investment in TSL will be transferred to a wholly owned subsidiary, TIL. This will be from 1 November 2015. The consideration for the transfer will be discharged by TIL by the issuance of equity shares to the shareholders of Triveni Engineering in the ratio of one equity share of TIL for every equity share held in Triveni Engineering. TIL will be listed.
In summary, Triveni Engineering will demerge the sugar business into a separate listed company with mirror shareholding. Sugar is a loss-making business, while the engineering business is profitable.
Triveni Engineering is among the largest sugar manufacturers in the country. The market leader in the engineering business, with a share of 70% in high-speed gears and gear boxes up to 70-MW capacity and speed of 70,000 revolutions per minute, is also among the leading companies in the high-technology water and wastewater management segment. The outstanding order book was a healthy Rs 69 crore for gears and Rs 694 crore in the water segment end September 2015.
In December 2015, KEI Industries bagged an order worth Rs 385 crore from Power Grid Corporation of India for supply and service contracts for package A and B under the intergraded power development scheme works at Varanasi in Uttar Pradesh. Orders outstanding were Rs 1700 crore end September 2015. The turnover was Rs 2031 crore in FY 2015. There is expectation of decline in debt going ahead. Debt stood at Rs 453 crore and the debt-to-equity ratio at 2 times end FY 2015.
The product basket of one of the leading manufacturers of cable includes low-voltage cables, medium-voltage cables, extra-high voltage cables, winding wires and house wires. Also, there is presence in the engineering, procurement and construction (EPC) business. The EPC segment comprises power transmission, cable systems, electrical balance of plant system for power plant and electrical industrial projects. Headquarters at New Delhi, manufacturing facilities are located at Bhiwadi and Chopanki in Rajasthan and Silvassa, a Union Territory. The user industries include power, oil refineries, railways, automobiles, cement, steel, fertilizers, textile and real estate amongst others.
As much as 68% of the revenues came from the institutional segment, followed by retail (25%) and exports (7%) in FY 2015. Net sales increased 25.7% and net profit 111.3% in the six months ended September 2015. Presently, products and services are exported to 45 countries. Apart from an office in Dubai, offices were recently opened in Singapore, Nigeria, Kazakistanapart to scale up exports. Mutual funds held 10.89% equity in the small cap end September 2015.
Gulshan Polyols (GPL) achieved the highest-ever quarterly net sales of Rs 108.9 crore in the second quarter ended September 2015. An interim dividend of 35% was declared in October 2015. With a comfortable leverage, the debt-to-equity ratio was 0.44 times end March 2015. Mutual funds owned 6.75% equity end September 2015.
The business portfolio includes starch sugars, calcium carbonate, alcohol, agro-based animal feed and on-site precipitated calcium carbonate (PCC) plants with production facilities at Muzaffarnagar in UP, Bharuch in Gujarat, Dhaula Kuan in Himachal Pradesh, Abu Road in Rajasthan, Patiala in Punjab and Tribeni in West Bengal.
The wide range of industries and niche markets in the core sector catered to encompass pharmaceuticals, personal-care, footwear, tyres, rubber, plastics, paints, alcohol, value added paper, agrochemicals, food and agro products. Clients include Colgate, Palmolive, Hindustan Unilever Ltd, Dabur, Asian Paints and ITC. The recognized star export house has presence in 35 countries.
Construction of a distillery project to produce potable alcohol is going on in full swing at Borgoan, district Chhindwara in Madhya Pradesh (MP), with zero-liquid discharge facility. The commissioning of the project is likely by March 2016. Further, construction of the unit to produce grain-based starch derivative, namely liquid glucose, dextrose monohydrate (DMH) and maltodextrin powder (MDP), is going on in full swing at Muzaffarnagar. The unit is expected go to commercial in March 2016.
These two new plants will be a major breakthrough. Additional revenues of Rs 250 crore are expected from both these projects in FY 2017. Revenues of Rs 402 crore were clocked in FY 2015.
Also, capacity expansion to produce starch sugar, that is, liquid glucose, ?MDP, ?DMH and glucose powder, has been undertaken at the Muzaffarnagar facility.
PNC Infratech is another company with far better revenue visibility, with an outstanding order book of Rs 3578 crore end September 2015. It had secured new orders worth Rs 1743 crore in the first half of the current fiscal. Additionally, letters of award are awaited for two projects, with aggregate order value of Rs 812 crore, being the lowest bidder. Consolidated revenues increased 26% and net profit declined 6% in H1 of FY 2016.
The infrastructure construction, development and management company with expertise in infrastructure projects such as highways, bridges, flyovers, airport, runways, power transmission lines, development of industrial areas and other infrastructure activities has executed 48 projects across Rajasthan, Punjab, Haryana, Uttarakhand, UP, Delhi, Bihar, West Bengal, Assam, MP, Maharashtra, Karnataka and Tamil Nadu since inception. Currently, work is on 20 projects on an EPC basis.
Including subsidiaries, associates and joint ventures, there is a portfolio of seven build-operate-transfer projects and one operate-maintain-transfer project. Of these, seven projects are operational.
The 2015-listed company has high leverage, with debt of Rs 1692.4 crore and a debt-to-equity ratio of 1.72 times end March 2015. Recently, long-term credit rating was upgraded by Care from A to A+ and short-term credit rating from A1 to A1+.
8K Miles Software Services continues to be on the high-growth trajectory. Consolidated total income grew 125% to Rs 185.8 crore, while net profit increased 114.5% to Rs 27.2 crore in the nine months ended December 2015. Total income increased 183% and net profit 212% in FY 2015. No dividend was declared for FY 2015 and FY 2014 to conserve resources.
One of the leading cloud and security solutions companies has developed, deployed and delivered a wide range of solutions covering a diverse set of clients and industries with emphasis on healthcare and life science industries. Digital technology solutions offered include social, mobile, analytics and cloud for seamless connectivity between consumers, small and medium businesses, large enterprises, healthcare providers and pharmaceutical companies.
In FY 2015, there were three acquisitions: SERJ Solutions (an EHR software implementation and managed services provider in the healthcare space), Mindprint (Canada-based clinical research process automation services provider) and Cintel Systems (specializing in mobile, ??UI design and UX development services).
In the December 2015 quarter, the acquisition and integration of NexAge Technologies USA Inc, a regulatory compliance and technology solutions provider for the life-sciences industry in the US, was completed. This will strengthen the life-sciences solutions portfolio.
Cloud-computing is disrupting and dismantling legacy information technology models. It is compelling enterprises to replace physical servers and move and migrate to cloud, a cost- effective solution. This trend offers unprecedented growth opportunity. As per estimates, the public cloud market is expected to touch US$ 282 billion by CY 2018 from US$177 billion in CY 2015.
Conclusion
A few among the shortlisted stocks are available at expensive valuations. Investors have to take the price-earnings ratio into consideration while exploring these stocks for investment. Further, investing in small caps is a high-risk investment strategy. Therefore, investors should assess their risk-bearing capacities before taking the plunge. Capital erosion can be significant in small-cap stocks compared with large caps.
Investors should focus on the size of the industry, i.e., the business opportunity, while taking a call on small caps. A robust industry outlook is a must. There should be enough space for small-cap companies to grow their businesses and create shareholders' wealth in the process. In this context, Skipper is an appropriate example. It aims to become a one-billion-dollar company by CY 2020. Power transmission towers and distribution poles and water transmission pipes and fittings present huge opportunity due to the infrastructure spend particularly by Central and state governments. The Union government has set an ambitious target of Rs 1 lakh crore for setting up transmission projects.
Information about small-cap stocks is not easily available. This could hinder in-depth research and analysis. Investors might have to take investment decision based on whatever scanty information available. Further, the promoters might be unknown. Thus, assessing corporate governance might be a tough job.
Mutual fund holding is tiny in a few stocks. In a way, this could be just a token investment made by fund houses. Besides, the presence of mutual funds can only provide some sort of assurance but offer no guarantee of returns or on the quality of stocks.
These stocks had certain triggers in place. Probably, these have already been recognized by the markets. The bet is that these companies will become bigger and better. If investors share this optimism, these stocks can be explored for investment.
--CA Mihir Desai
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