This Gujarat based company is one of the best small cap companies in a sector that creates civil infrastructure and also has a subsidiary in a fast growing economy of Eastern Africa. The subsidiary was set up in the latter half of last decade. The subsidiary was getting small orders for initial part after its inception but since last year the order inflow (size) increased and earlier this year they signed a massive MoU with that East African Government and the revenue inflow would start from this quarter and carry on for further three years and this would dramatically change the entire earnings profile of the company (though even on standalone basis company has shown excellent growth for last so many years –around 34% CAGR on both topline and bottomline since FY10). The company is in a space where most of the companies get work because of their political connections but this company does not believe in it and has been bagging contracts purely on basis of its superior and time-bound execution capabilities, without any cost escalations and this has reflected in the wonderful return ratios and significant cash balance.
The company is trading at extremely cheap very low single digit PE and even market cap to sales is at very low fractions whereas the other companies in the same sector are trading at high double digit PEs and 2-3 times sales to market cap. The company has cash on their books which is nearly 40% of its market cap (this is important to note as the companies in this sector struggle to have cash balance). The company (standalone) is effectively debt-free. Though the company has debt on its standalone balance sheet but has almost equal amount of cash on its books as well (there’s an intelligent reason behind that and this should be clear in the stock story). Also, though the consolidated balance sheet has higher debt (this is because of its unique business model of the subsidiary and therefore, the debt is not of too much concern – as would become evident from the stock story). The promoters own almost half of the company and still they have been buying the shares from the open market in last couple of quarters too. The company rewards its shareholders whenever the going has been good. Fy13 was slightly below par (as per company’s standard but way better than industry) and the company had to compromise on margins to bag orders and therefore, cash was retained. Interesting, unlike the industry, the company recovered very smartly in next FY (i.e FY14) and margins and revenue both grew (YoY) though the cash was retained to beef up the fiscal position of the company (again explained in detailed in the stock story) which is reflected with cash on books. The company also has a high tax payout, industry leading return ratios, which along with cash on books reflects the quality and sanity of the earnings.
Technicals: Solid. Though the markets are tanking, this stock has refused to give up even an inch and is in fact ending on green even when there is market carnage. Needless to say technically the stock is simply solid at the moment and is also trading above all of its Simple Moving Averages.
Note: The Company is a stock pickers delight. It proves once again that there are numerous gems in this sea of small caps and all that you need is an eye for detail. Companies like this that have boring and spiritual name is easily overlooked by investors. The company has one of the best return ratios and margins in the industry, is effectively debt-free and has shown strong growth over the years and the trend is only expected to strengthen moving forward. The company is backed by very smart management and deserves a much higher valuation. The stock (which is not a 10rs FV) is a perfect case of being a value pick backed by huge trigger for future growth. Given cheap valuations, the re-rating along with growth could create massive wealth for its shareholders in time to come.
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