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.