Hidden Gem Stock of May'14 is Released!

Dear Reader,

Hidden Gem - May'14 research report is released by our team. Hidden Gem stock selected for the month is a small cap stock with total market cap of less than 200 crores.

Our Hidden Gem stock of May'14 belongs to auto ancillary industry. The fortunes of the auto ancillary sector are closely linked to those of the auto sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. Margins in the replacement market are higher than the OEM market. The OEM market is very competitive and component manufacturers have to compromise on margins to bag bulk orders. Moreover, delivery schedules and quality standards have to be adhered to very strictly. 

Lower labour costs give Indian auto ancillary companies an absolute cost advantage. To put things in perspective, ACMA numbers suggest that wage cost accounts for 3% to 15% of revenues for Indian manufacturers as compared to 20% to 40% for US players. India's strength in exports lies in forgings, castings and plastics historically. But this is changing with more component manufactures investing in up gradation of technology in recent years.

The automobile sector is cyclical and dependent on the growth of the economy and improvement in infrastructure. Factors like increased public spending, favorable interest rates and general improvement in per capita income point towards higher demand for automobiles in the future. Also, government's initiatives in the infrastructure sector such as the Golden Quadrilateral project and NHDP (National Highway Development Programme) are likely to give boost to four-wheeler sales especially CVs. Just to put things in perspective, we expect CV segment to grow by 7% to 8%, 2-wheeler demand to increase by around 12% to 15% and passenger car sales growth at 10% to 12% over the medium to long term. 

This is a positive for auto ancillary manufacturers. This sector has the potential to zoom to a level of US$ 113 billion by the year 2020 - 21. India has about 400 major players in the auto components field catering to the OE market. Characterized by high quality and economical prices, India is regarded internationally as amongst the most competitive auto parts manufacturer. This industry is projected to grow at over 15 per cent annually in the coming years.

Hidden Gem Stock of May 2014

While finalizing Hidden Gem stock of the month from auto ancillary industry, our team has followed Walter Schloss priniciple's. Walter J. Schloss (August 28, 1916 – February 19, 2012) was a well-regarded value investor, as well as a notable disciple of the Benjamin Graham school of investing.

The legendary Walter Schloss checked the stock on the following 4 criteria to determine if the stock merits a place in the portfolio:

• Zero or very low debt equity ratio

• High Promoter holding

• Dividend yield of at least 3%

• Stock purchase price lower than book value

This company satisfies 3 criteria's out of 4 and offer good upside potential with limited downside risk in near future.

Few facts which make this company a right investment candidate for long term:

1. Company is making investment of more than 100 crores in next 2 years on research and development to maintain its leadership position in domestic market and also to increase its export business.

2. Company offers high quality products and its facilities are certified with international standards to ensure product quality to meet international requirements and supplies its products to more than 15 countries.

3. Besides the domestic market, company is also focusing on increasing its exports (which offer huge growth opportunity) targeting 15% of its sales contribution by 2015-16.

4. Management has rewarded share holders by paying regular dividends consistently since last 6 years, dividend yield at current market price is above 3.

5. Promoters share holding is well above 60%. Moreover, promoters have increased their share holding significantly doing open market purchases during last one year.

6. In terms of valuation, company is trading at estimated PE ratio of 6.5 and considering increase in revenues and better operating margins, it offers good investment opportunity for medium to long term investors.

Grab our Hidden Gem - May'14 research report and invest small portion of your savings in it for long term.

On activation of your Hidden Gems subscription, you will also receive 2 freebies at no additional cost!

1. Saral Gyan 5 Hidden Gems - 5-Baggers in 5 Years Report - April'14 update

2. Saral Gyan eBook - "How to Grow your Savings?" worth Rs. 599.

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Wish you happy & safe Investing!

Regards,

Team - Saral Gyan,

Saral Gyan Capital Services.