Dalal-street team wishes you & your family a very Happy & Prosperous New Year!
2013 has been a great year for markets, especially the mid cap area we focus on. The best thing about markets has been that it has focused on quality and rewarded companies with good balance sheet, business model and corporate governance. Several stocks which we discussed earlier like Astral Poly, Ajanta Pharma, Atul Auto, Mayur Uniquoters, Poly Medicure etc underwent multiple re-ratings and delivered multi-bagger returns. While at the same time cos with poor track records and corporate governance standards are just languishing and long term returns have been very poor. This will go a long way in encouraging investors, companies etc to seek something unique and establish high governance standards.
“In the short run, the market is a voting machine but in the long run it is a weighing machine.” – Benjamin Graham
We have great hopes for 2014. Being the big election year, it is heartening to see a big political change happening. People are demanding better governance here too and these things will hopefully make India a better country and speed up the development and prosperity in years to come.
Another positive thing happening in our market is the dilution of Periodic Call Auction System(PCAS) introduced earlier which had affected more than 2200 companies and trading in them had become very tough which had impacted the small investors and sentiment in a big way. As per the new rules, most of the stocks will come out of this rule. Over last few months we had been working on a basket of companies trading at very attractive valuations but affected due to this rule, we expect them to do well.
In our last blogpost we had mentioned some ideas we were working on. Here are more details:
1. APM Industry: Though the co is present in the un-exciting textile industry however the nos of last 4-5 years are worth taking a look. The sales have almost doubled from 160 Cr in 2008 to 290 Cr in 2013 while the margins have improved every year from just 5.5% then to 13.50% in 2013 and hence the net profits have increased from less than 1 Cr to 22 Cr in 2013.
The most interesting part is the balance sheet – unlike other textile companies, the co has used the earnings to repay debt and has become debt free. Plus the dividends have been increased every year and the stock offers an attractive dividend yield of 6% at CMP of 27. PE ratio is just 2.5 and stock is trading below BV.
Risk – as its a very small company, its tough to access the reason behind the change. If the same is due to cyclicality in end product rather than actual management efforts then it may be a value trap.
2. Muthoot Capital: Muthoot Capital is a part of the famous Muthoot group but they are not into gold loan financing as generally perceived. They are a NBFC with focus on lending to two wheelers, three wheelers and light commercial vehicles sector. The company has been growing aggressively at a CAGR of 55% over last 5 years. They do target to maintain high growth rates going forward.
The valuations seem attractive as the stock is trading at 4.5 PE, less than 1 times BV and providing a dividend yield of 5%.
3. Kitex Garments: This company is part of the reputed Anna group of Kerala. Kitex manufactures infant garments and supplies to one of the biggest global retailers like Toys R Us, Gerber, Wal-Mart, Jockey etc. The company is known for its superior quality, facilities and efficient production management.
Here is a very insightful corporate video
The company has very good financial ratios but the company didn’t grow much over last couple of years due to political problems and lack of approvals for expansion. It seems the problems are over now. If the company is going ahead with the expansions planned earlier, the company should do well.
Apart from these, we are studying Selan Exploration. The company has rich oil fields with high proven reserves. The company has a very strong balance sheet with clean cash flows and surplus cash on balance sheet. The stock trades at about 9-10 times the annual free cash flows. The concern has been that due to lack of regulatory approvals there hasn’t been any growth over last few years. As the sector has started getting approvals, finally the ramp up may happen and the company may do well in coming years.
Wish all our readers a Very Happy New Year!