Smallcap Hunters: How to deal with a volatile equity market?
By Arun Mukherjee & Soumya Malini
(Kolkatas Arun Mukherjee, a college dropout by choice, and Soumya Malani, a London School of Economics passout, have come to be known as smallcap aficionados in Indias investor community. They would show up at most AGMs, visit the remotest factories of a company and go chasing end-users to understand their experiences with a product in their passionate hunt for good smallcaps. Soumya and Arun would be sharing their experiences with companies and from the ground in this space every now and then. Keep watching…)
Forget all the macro worries and lets focus only on something where you need to.
Theres no bull or bear market this days, as the cycle has shortened. Previously, it would be a five-year bull market and bear market with same kind of duration, but now these phases are more frequent.
Its futile to hazard a guess on bull market duration. Instead, simply stay put on good stocks which have the backing of a sky is the limit kind of aspiring jockey, read management team. Wherever there is growth, the market is bound to pay a premium.
Nothing actually changed over the past few months, yet at the time of writing of this note, the BSE Smallcap index was down 35 per cent from its peak, which is staggering. The greed-and-fear syndrome is back in the market, with the latter being more dominant at this point.
In a good market, the PE gets rerated and vice versa. Soon, the albatrosses would find their junk desolated venue to make way for the quality ones. Your patience will get tested, and conviction would be handsomely rewarded.
If you are anxious about your portfolio but possess good quality stocks with solid growth potential ahead backed by a robust pedigree, sooth your nerves by fathoming this simple thing.
This country is happy to grow at 6-7 per cent, yet companies in your portfolio would grow at a minimum 20-25 per cent. A few will grow at 40-50 per cent CAGR over next 3-5 years. Thats serious growth, folks.
Its only a matter of time before sanity returns to the market, leading to eventual rerating of good stocks irrespective of whether there are smallcaps, midcaps or largecaps.
When we go and speak to all the managements or visit a plant, its a complete different scenario. Everyone seems to be working overtime. The order books are full, theres more enquiries than ever, new employees are getting recruited, plants are being expanded: all of this takes you into a different state of mind altogether.
The ideology is simple: try to find that lucrative business ownership and stock markets would automatically be a different place for you.
Avanti Feeds moved from Rs 7 to Rs 3,000 in a matter of eight years. Nalanda Capital swallowed a chunk of Page Industries in 2007 at Rs 600 only to discover the full potential at over Rs 30,000. Symphony moved from Rs 2 to Rs 1,200 in almost the same period.
Enough of listening to sob stories. Its high time you avail the bragging rights, by simply staying put in companies you own as long as their growth stories are intact. With time, they can only make you richer.
Conclusion: It fascinates us to see so many gullible retail investors still happy locking their money in bank FDs for decades, generating absolute peanuts in post-tax returns but still hesitating to that extra distance to get the best wealth generation asset in the world. The good part is all you need is time and patience to grow richer in this game. And the bad part is, some of you will watch, read, understand everything yet panic and sell it to your neighbours at least prices only to see them get liberated at the age of 40 vs your liberation at the grandpa age of 60. Decide on which boat you want to sail.
Kingfa Science AGM Notes:-
1. This company is into compounding thermoplastics. Currently, the total capacity stands at 1.2 lakh tonnes ( last year it was 50,000 tonnes). When they acquired Kingfa India, which was Hydro S&S, it had a capacity of 25,000 tonnes.
2. It Chakkan plant will be operational from Jan-March 2019 . There will be two phases: Phase 1 will be for 1.8 lakh tonnes and Phase 2 another 1.8 lakh tonnes.
3. The management aims to do Rs 4 lakh tonnes by December, 2023. They will need capex for Phase 2 of Chakkan plant, but that is still some distance away.
5. Apart from the automobile industry business, the company also supplies to manufacturers of ACs, washing machines and some other consumer durables. It aims to have a 60-40 split between auto and the remaining segments.
6. The management highly bullish about robust growth over next few years and is confident of growing at 40-50 per cent CAGR over next 6-7 years.
7. Less margins in Q1 were due to forex issues. High crude price and a weak rupee should be taken into account in next quarter pricing to customers. They are unlikely to lose out anything due to crude price rise and rupee fluctuations; just that the movement will get adjusted in the next quarters pricing. So there will be a lag. They raised prices in July and will raise again in October.
8. The company has started exporting to Africa. This year, exports will contribute 2 per cent to turnover. In next three years, exports are expected to contribute 20 per cent of total turnover.
9. Trumps trade war with China is likely to mean more business for this Indian firm, as a lot of rerouting will happen. The parent firm is very bullish on India.
10. Last year the company achieved 54,000 tonnes, expects to close this financial year at 70,000 tonnes. FY19-20 will see it cross 1 lakh tonnes convincingly. Average realisations are expected to be much higher than Rs 113 per kilo now. Blended realisation in next 5-6 years can fetch up to Rs 150.
Our Take. The note came from Moitraya Roy, an ardent fan of our ShareBazaar app. Mr Roy travelled all the way from his unheard of village in Hooghlys Pipulpati to Chennai. Kingfa India is the Indian baby of its hugely powerful Chinese parent, Kingfa China, which is one of worlds largest plastic compounders. Even without its Chakan plant, Kingfa shouldnt face any issue in scaling up. It has silently expanded capacity to 1 lakh tonnes. The Chakan plant would hopefully get operational by end of this calendar.
Kingfa remains a 2024 story, by which it aims to be a 4 lakh tonnes giant. If we have to extrapolate that in number, it would look something like this: 4 lakh tonnes with realisation of Rs 150 per kilo and 5 per cent NPM, which is Rs 6,000 crore and a Rs 300 crore PAT. They have done this at a faster pace in China. In fact the Chinese parent grew at an astounding speed of 65 per cent CAGR during 1992-2013. Replicating the same in India shouldnt be much of an issue. Time will tell us how things work out for this company.
Guess the stock:-
(In this segment, we offer you cues about a business that has an interesting story to tell. You can name the stock in the comment section below this article and the results will be declared on October 22, 2018 . The first right answer wins a branded bag from ETMarkets.com. Answer to last weeks Guess the stock contest is Autoline Industries. And the winner is Vivek.)
1. This company is a vertically integrated retailer. It sells fashion-related stuff and lifestyle products.
2. The company sources raw material from Hong Kong, Thailand, manufactures the end product in Jaipur and sells it in the US and UK. Because the biggies in the US source it from this company, it can sell the same product at a 60 per cent discount.
3. It is in business for eight years. The biggest player in the US has a revenue of $10 billion. This companys major expense is broadcasting cost, which is nearly 15 per cent of the revenue. Recently, the same has been coming down.
4. Recently the company has started giving EMI facility, which is affecting its working capital. As much as 35 per cent of the incremental revenue is coming from budget pay, i.e. EMI.
5. It has 3,50,000 unique customers coming on its website or TV channel every year. The company has given guidance for low double-digit growth this financial year.
6. In last two years, the company has been transforming it platform to achieve sustainable growth. Going forward, the company sees a lot of operating leverage coming into the business. A major chunck of its cost is fixed. Hence, incremental sales will start flowing to Ebitda.
7. It has tied up with most of the OTT platforms like Roku, Amazon Fire. It has also stated selling on Amazon. Amazon will always be a threat, but TV shopping has been existing in the US for ages.
8. It reaches 78 million households in the US out of 110, hence there is scope for increasing it there. It has reached around 60 million household in UK, the max it can do.
9. The average selling price for them is $20. The company is focused on a product of volume and price, and not only price. It will sell whatever it can sell the most. Currently, the revenue share of the B2B business is 10 per cent.
10) Over the past 15 years, it has been both a huge wealth creator as well as a massive wealth destructor from its highs. As on date, it market cap is less than Rs 2,500 crore.