Name This Gem 4

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.

God Bless!!!

guys, please do not post comments with numbers as i cannot confirm/deny them, so i will not publish anything with numbers. if you still want to know- email me, but just post generic comments or doubts. Since the stock story is not published, a lot of things that you understand or interpret cannot be explained on the blog because of obvious reasons and anything that you act on, based on this interpretation, you yourself are responsible.

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99 Responses to Name This Gem 4

  1. pavans13 says:

    Dear Ace…Wish you happy Ugadi ! Thanks for the new gem. Started researching….!

  2. Naman says:

    Dear sir.. when will you disclose the name .?

  3. Sameer Anand says:

    For a moment I thought it was “OM Metals Infraprojects Ltd” but it is Rajasthan based So giving it a pass.
    Is it listed on both Exchanges ACE?

  4. mta says:

    gud morning Ace,

    sir I would like to know ur views on kellton tech.


  5. Kiran says:


    Your Views on ‘Natural Capsules’?

  6. shreeux says:

    Hi Ace,

    Thanks for New Jem..!!!

    Your views on Indian Overseas Bank..Its accumulate to current level or stay away?

  7. amit san says:

    For garware wall rope what is impact of crude oill prices . Will present quarter show its benefit or invrntory losses be shown.stock down 225% from top.will it be ok to average.

    • 225% ? how can a stock come down more than 100%🙂 ? anyways, let me ask you, what do you think is the impact of lowering crude prices on its business? I am sure you have researched its product.

  8. Ravi says:

    Its good that this gem company expanding its business in eastern africa. But i see a lot of companies could not get best out of this african geography.
    Like bharti airtel, oil india, ongc, l&t, etc…

    Can this company will able to get profit out of its operstions from africa.considering a lot of rest in those areas at present?!!

    • bharti airtel and PSUs did acquisitions which is totally different as you have to pay according to value you associate with it and if that’s wrong then that acquisition is doomed. this company has not done any acquisition and their line of business is very different from the one’s that you are talking about. Furthermore, its already proven that they are doing very well in East africa as reflected from their order wins so to question their decision to move to east africa is irrelevant as the move has already paid now.

  9. Kandarp says:

    ace, in the 2nd para, did u mean market cap to sales?

  10. abhishek says:

    HI Ace,
    Can you give one more hint – which category it falls in – market cap below 200cr, between 200 to 500 crore or above 500 crore ?

  11. pruthvi says:

    Is it a good sign any construction company ,if the inventory (Certified Stock) is high compared to previous year/. Does it mean sales are not good enough. why the company is building its inventory up. why the inventory (certified stock) for construction companies can be high .
    is this a worrying factor?.
    Can you explain a bit.


  12. hg says:

    Good exercise with enough hints. Lets all pray to God that our dreams come true.

  13. pruthvi says:

    No doubt Gem 4 is a wonderful pick. I am worried only about one factor.
    Request you to go through the balance sheet of gem 4 , consolidated balance sheet , note no 18. Do you think some thing fishy? .
    I am little concerned about it.
    Request you to clarify on that.

    • no nothing fishy. would suggest you to dig a little deeper to understand the reason behind it (though not sure we both are talking about the same things or not). also, its important to understand their business completely to allay any confusion. Also, lets not forget the tax part and the fact that earnings profile of their subsidiary changes drastically from late this FY. And yes, i would agree that this is a very good pick for more than one reasons and also like that fact there are some readers like you who have an eye for detail … God Bless

      • pruthvi says:

        Not getting convinced sir.
        I am diggin in it , because i dont want to miss this gem.
        Please clarify mu doubts.
        whether the balance sheet is clean and green?

        The only big red flag i am finding is , the continuous increase of inventory.
        Inventory is almost 4 times that of market cap. For any reason if its is a cooked up number then god balaji only have to save investors. if in future company decides one time exceptional loss on inventory nothing will be left with the company except the debt.
        Agreed that cash in stand alone case is same as debt , but the case is not the same in consolidated , debt is much mush higher than cash. debt is multiple of market cap.
        Request you to through some light on current assets and current liabilities in the consolidated balance sheet.

        • let me take your issues point wise. its difficult for me to answer in detail as i do not wish to divulge too many obvious hints. 1. how does it matter if inventory is 4 times market cap or 40 times in this case? we should not consider that in assigning higher valuations to the company. in this case inventory is not a perishable commodity so why would the company ever take an exceptional loss ?
          2. As i said in the brief snippet the business model of the subsidiary is very different and therefore, the debt is serving a very different purpose. also for consolidated entity the interest coverage ratio is 2.5 times, which is fine, why should then debt be of a concern especially when the business model takes care of most of the things here.

    • pruthvi says:

      thank you sir for the clarification.

  14. Kandarp says:

    found it.

  15. Manoj Dua says:

    It has quite negative cash from from operations in consolidated last 4 years due to increase in inventory ..

    • for the sector in which this company operates this is not at all a problem. this is the nature of this sector. even the best listed company of this sector has had negative cash from operations for so many years in a row. as i said its the nature of the best (vertical) .

  16. meinhoonpatel says:

    pruthvi you are totally confused i think. let me also add to what ace said here. We are not taking about receivables that the company would write off it causing one-time loss (like in wanbury). We are talking about inventories here. Remember the company (yes even i cracked it) has accounted inventory at cost, therefore, given the kind of inventory it is, the value of inventory is only going to increase with time. Also understand that inventory is not in earnings right now, its just inventory. Lets say for the sake of argument 3 yrs later the company decides to reduce inventory dramatically but given that value of inventory would have increased considerably in this time (you know right what kind of inventory we are talking about) and even given some discount it would be way higher than cost giving good boost to the earnings. why do you think mumbai real estate developers are surviving despite of flats being left unsold, that’s because of inventory – they keep on increasing the cost and therefore, whenever they sell -even at discount they make money. this is the way around the world industry works. So if you tell me that they will take a loss because of inventory then there’s something wrong with what you are getting at. if it was freshtrop kinnd of inventory i would understand , but this….no way…this is not a problem. I hope i could help.

    Ace, another thing, as a user i can vouch for the india company’s development work. My in-laws are based in one of the schemes of these guys. also, i have an expat friend in that african country and would request him to give me some update about that company and would update the blog. Thanks for the gem.

    As someone said, that the best investments are always in-front of us. Never thought this would happen to me too…

  17. Sameer Anand says:

    ACE, request you to incorporate details about management – vision, capability etc when you finally reveal the stock story next week.

  18. STP says:

    Hi Ace Sir.. I think I have got the gem.. But honestly speaking I am expecting it to rise by 20-25% by the time I get hold of it.. Do u think this gem would be worth the purchase even at that rate? Thanks in advance for ur guidance…

    • i doubt that but its your decision. but if you buy a 5 PE company and the price increase by 30% its still 6.5 PE, and if you think that’s paying too much then pls do not buy … so basically it depends on investor as to how convinced he/she is about the company and whether they are interested in the valuations assigned to the company or not.

      • STP says:

        Thank u sir.. I really hope I get hold of some shares soon.. Also sir.. Do u see any reason for the sharp fall in the price of v2 retail n vidhi.. Is it a correction or indicative of something bad ahead?

        • see, vidhi has hardly sold of 20% from its top and vidhi is a wonderful company, with downside protected. its trading at very cheap valuations with great dividend and hardly any debt. with the new capacities coming online this month, the stock is very attractive at current prices.

      • STP says:

        Thank u sir for ur reply.. But it would b v kind if u cud explain d downfall of v2 as well since it has fallen by more than 30% from its top..

  19. hafizul09 says:

    Hello Ace ji….this gem has Contingent Liabilities of 50 cr. plus….any idea why is that…? is there similar issue like V2(I mean court case)?? Thanks in advance!!!!

    • first of all, i cannot confirm numbers because of obvious reasons but yes it does have contingent liabilities and its clearly detailed in AR. no its contingent liabilities are not like V2, its more like voltas or an infosys contingent liabilities

  20. Rohit says:

    Dear Ace,
    If I have got it right,then it’s hard to enter as the traded value many times in recent history does not cross even Rs. 1 lac!!!

  21. guys, please do not post comments with numbers as i cannot confirm/deny them, so i will not publish anything with numbers. if you still want to know- email me, but just post generic comments or doubts. Since the stock story is not published, a lot of things that you understand or interpret cannot be explained on the blog because of obvious reasons and anything that you act on, based on this interpretation, you yourself are responsible.

  22. apawsum says:

    Thanks ACE & other team members, have identified the GEM with your support so it’s a buy tomorrow.I also happen to have a banker friend in the country where they are developing 6 locations apart from other welfare facilities. Any specific questions you want me check with him i can try.
    Thanks & regards-Ap

  23. apawsum says:

    Let me check first thing tomorrow morning, will revert on any update received.

  24. mesh says:

    sir worried about other then promoters who holds stake in co & they are frequent traders….

  25. mesh says:

    New looks hot like wanbury was at 28 …..
    technical looks very interesting……
    on otherside Other then promoters to look out on liquidity………

  26. mesh says:

    About New gem

  27. breakdawallmakeyourstreet says:

    at circuit

  28. Sameer Anand. says:

    People have become pretty smart these days. Gem is frozen.

  29. Murty says:

    Lord Balaji bless you dear Ace

  30. deepak says:

    Hi Ace, Can I enter in Aimco at cmp ? it seems 52 is good support level so might be good entry.

  31. bingo says:

    sir can you please post your traders only picks on this blog also just like Facebook?

  32. umesh says:

    ace ji what is yr face book id

  33. mesh says:

    Ur clue are perfect
    buyers are not that much qty
    if 5 lacs shares were in pending then we can say that ur clue are too much….
    so u are bulls eye….

  34. neelbasura says:

    Hi Ace,
    Among lubricant space, which company you are most bullish on

  35. Sameer Anand says:

    ACE, what is happening to the Indian stocks?. Even quality midcaps breaking all support levels daily. Liberty below 250- available at less than 15 times its estimated next year’s earnings.

    • nothiing much…the makets rose from from 5100 to 9000 non-stop, and that’s a pretty good move, just consolidating a bit. And probably also reminding us that patience is what makes money in the markets. investors and traders had been spoiled in last 5 quarters with the kind of gains they saw, markets just reminding them of mean-reversion principle.

      • Niranjan says:

        Yup Mean reversions .. one of the hard truths of markets🙂

        Ace, what levels you think Nifty would retrace to? isnt 30 % of the total upmove a healthy correction? which should take us around 8000-8100 levels.


        • well, i’ll probably take it one week at a time….right now 8400-8500 is a strong support and ofcourse if that breaks 8150-8200 could come… but good news is that so far i dont see a crash (ofcourse i could be wrong) and it would be a zig-zag move and even better news is that there would be stocks that would be way higher even if the nifty was to fall down 5-10%.

      • Niranjan says:

        I agree with you, don’t really foresee a crash or dip below 8000 but my strategy is just to keep buying every month in stocks where I see value and not time the market per se…

        • no no, let me clarify. what i mean is i do not see markets crashing …that means going in one direction only but i do expect it to be a slow and steady with zig-zag kind of decline but below 8000 is still a remote possibility but then i would like to take it one support at a time…8400-8500 …8100-8150 and then below that 4-5% more decline but i think it should be the worst case scenario. lets see but…not too worried to be honest.

      • Niranjan says:

        Noted with thanks🙂

  36. amit san says:

    is garware rope a buy now 25 percent down from top.where is support for it.drop in crude will help it.

  37. mesh says:

    new gem
    on near to breakout like wanbury if sustain at cmp………
    thanks ace
    despite midcap breaking ur gem is rocking …….

  38. mahavir says:

    Hi Buddy
    Can i invest in rohit pulp for long term.

  39. vivek says:

    Dear Ace, please share your views on Zensar Tech, LG balakrishnan and Gujarat Automotive Gears.
    thanks in advance

  40. Mesh says:

    Cybertech moving
    Harrison will move
    Indag rubber looks hot on charts…..
    Any fundamental idea about this

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