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Monday, March 3, 2014

Hidden Gem - Feb'14 - 70% Expected Returns in 18-24 Months

Dear Reader,

Our team has released Hidden Gem - Feb'14 recently. This company belongs to the industry which is going through the rough patch due to slowdown in the Indian economy. When major players of the industry are reporting de-growth in their top line, this is one of the company which has registered consistent top line growth of more than 18% during last 1 year. Further, profit margins of the company have also improved because of lower material cost and effective cost management strategy.

Few facts about the company which makes it a strong investment candidate at current price:

1. Sales turnover of the company have grown by almost 200% in the last 4 years and operating margins have expanded from 4-6% to around 9-11% leading to much higher growth in profitability. The company has further transformed from a regional player with a strong foot hold in few states to a pan-india player.

2. During H1 FY14, the segment to which company belongs to has witnessed a volume de-growth and the major players from the industry de-grew in sales volume whereas this company has registered a growth of 19% YoY. Company continue to outperform its competitors, it has delivered volume growth of above 18% in Jan and Feb’14 whereas domestic sales is still witnessing de-growth. The company expects to double its volume growth in next 3 years.

3. Company has made entry into new geographies within India but it still it has a long way to go as its base in other states is still very small. Moreover, company is also focusing on exports with plans to launch new models. As per ICRA research exports will be the fastest growing segment for the industry. In order to cater to the same, company has developed new products. We believe that company continue to outperform and will deliver volume and value growth of > 20% for next 2 - 3 years.

4. Management is now looking aggressive to continue grab domestic as well as exports market share for its products with expansion in distributor network. Company is increasing its dealer base to and new dealers are largely going to focus on untapped markets. The company is planning to enter into West Bengal and Tamil Nadu. Exports sales is also expected to augur well for the company as currently contribution of exports is less than 2%.

5. The company is currently working on establishing a new plant to increase its capacity which is expected to begin production in FY 16, the new plant will double the total capacity and will require an initial capex of Rs. 800 – 1000 million which would be primarily be funded through internal accruals and the balance sheet is likely to remain debt free. 

6. On the bottom-line front, from last 5-6 quarters the company is continuously reporting operating margin improvement due to lower material cost and effective cost management strategy. Going forward, we believe that the company would improve its volume growth aided by capacity expansion, increasing dealership network in India and focus on exports. 

7. Management has rewarded shareholders by paying consistent dividends since last 4 years. Company has distributed 25% of its net profits in form of dividends. During the same period, company repaid its debt and is now a debt free company. Dividend yield at current market price is above 2. Company also issued bonus share to shareholders in the past at the ratio of 1:2.

8. At current market price, stock price to book value is 3.43. As per our estimates, company can deliver bottom line of 345 million for full financial year 2014 – 15 with forward P/E ratio of 9.1 X for FY 2014-15, which makes stock an attractive bet at CMP.

Considering reasonable valuations and opportunities in domestic & export markets, Saral Gyan team has recommended Buy on above discussed small cap stock with expected returns of 70%  over a period of 18-24 months.

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Team - Saral Gyan.