Background: It belongs to a non-agriculture industry that provides largest direct and non-direct employment in India. The industry relies heavily on government support for its survival and government has a special loan scheme for this particular sector. All the companies in this sector have huge debt on their balance sheet. The companies in this sector keep on diluting their equity to service their debts.
The Gem: What if there’s a company that has not diluted equity in last 8 yrs and has also drastically reduced debt (just through internal accruals)? What if the company has even pre-paid the loans and now has a debt to equity ratio one of lowest in the industry (without diluting equity remember)? What if I tell you that had you bought that company five yrs back (2009) then what ever you had paid in stock price have almost all been returned to you by means of dividends? Also, the dividends are increasing every year. What if I tell you it has one of the best 5 yrs RoCE/RoE/RoA in the industry? What if the PE is way below industry PE, infact is almost just twice of its Dividend Yield for this wonderful company? Ok, wait, What if I tell you that they have one of the best Net profit margins in the industry? What if I tell you that the stock is rock solid even in the most turbulent times? Whereas, companies in this sector has taken expansion at the expenditure of several hundred crores, this company I am talking about has already enough spare capacity? The company has been generating tremendous cash and that has played a significant role in debt reduction and has also increased the reserves tremendously (when reserves becomes several tens of times the equity capital, the companies normally give bonuses too – I am not saying it will happen, just FYI) and CRISIL has taken a note of it and has upgraded this gem’s rating for both short term debt and long term debt recently. Its product is used in manufacturing a premium day-to-day item and is number one in this important segment. It has never had any complaints with either clients or suppliers.
Technicals: Has Broken out after 10 yrs consolidation so technically brilliant.
Note: Please understand that that this sector is filled with gems and therefore, one should not look for a turnaround candidate (until and unless there’s an exceptional case). A turnaround candidate makes sense in established sectors. This sector has this brilliant company then why should we worry about companies that are trying to turnaround. Shouldn’t we stick to companies that have stood the test of times. Normally, the safest companies are the best investing options for long term and provides maximum wealth creation. Just take yourself to 2009 and think panic. During that panic you had a choice between a Kajaria Ceramics and Madhav Marbles, which one we should bet? Valuations wise not much difference right? Should we try to bet on madhav and pray every day and night for turnaround to be sustainable or just buy the best in business, kajaria and enjoy life?
By the way keep an eye on this sector as this sector has never led a bull market and with Modi Govt’s “Make In India” movement, along with the sector’s employment potential, this might be the sector to be in so if there’s a great gem available at throwaway valuations that has potential of becoming a large cap, it might be a good idea to invest in it for long term and reap the benefits in future.
In case you have any questions regarding this, mail me, no discussions on the blog please. Market cap is sub-300 cr as with the policy of this blog. Name would be revealed on Monday. God Bless.