The small and mid cap rally ended in Jan 2018 amid concerns over high valuations, waning domestic flows after re-categorisation of mutual fund schemes by SEBI, liquidity crunch and corporate governance issues. From their peak levels last year, mid cap and small cap stocks have witnessed significant correction over the past 15 months in spite of better bottom line of mid and small cap index companies compared to large caps.
It’s interesting to note that profitability of mid and small caps jumped 50 percent and 27 percent respectively in last one year against 7 percent earnings growth for Nifty 50 stocks. However, while major indices Sensex & Nifty is hovering at all time high delivering returns of 15.2% and 12.2% respectively since 1st Jan 2018, BSE Mid Cap and Small Cap index is down delivering returns of -17.1% and -24.5% respectively during the same period. With divergence of ~40% since Jan 2018 between small caps and Sensex large cap stocks, its very likely that we can see strong out performance from small and mid-caps delivering significantly higher returns over next 12 to 24 months compared to large caps.
We believe that broader market has already made its bottom in Feb 2019 and will show a significant recovery with rise in stock prices of small and mid caps based on earning growth in coming quarters. That spells opportunity, as many quality stocks from the mid and small cap segments are still ruling at multi-year low valuations, offering buying opportunities. Hence, this is the best time to build up equity portfolio gradually by investing in high quality small and mid caps backed by strong business fundamentals.
We are pleased to inform you that we have identified a small cap company which offers unique investment opportunity with potential of delivering 5-Bagger returns over period of next 5 years. Below are some of the reasons considering which we believe the company offers multibagger investment opportunity currently available at attractive valuations with huge upside potential.
1. The company operates in non-cyclical business, has a moat with well established brands, and strong growth potential with rising demand of its products. Being in B2C business, rising disposable income and consumer preference shifting towards premium products will support company to achieve robust revenue growth and profitability over next 3 to 5 years.
2. Favourable developments in the sector, recession proof business catering to domestic demand, significant capacity addition in past, thrust on becoming a pan India player from regional player and launch of new products with focus on end consumer are some of the reasons which make this company a right investment opportunity for medium to long term investors.
3. The company has robust fundamentals as it enjoys strong cash flow from operation. Its revenue and profitability has grown by more than 15% in the last 3 years, company’s bottom line is expected to grow well above 25% in coming years considering recent capacity addition and ongoing expansion with entry into new geographies. It has strong financials with ROE and ROCE of more than 15%. The balance sheet is strong with debt to equity ratio below 0.5 to support future growth.
4. The company is a small cap company with market capital to sales ratio of ~1.2, where as other mid size players are commanding market cap to sales ratio of ~3. In last 8 years, the company used to command market cap to sales ratio of 2.5 to 3 with higher price to book and PE ratio but due to severe correction over last 15 months, the company is now available at multi-year low valuations.
5. The company is paying dividend every year and dividend yield is maximum at current price compared to all other listed players in the Industry. We expect company to pay similar dividend for FY18-19 and increase it over next year. However, possibility of higher dividend payout for FY18-19 itself cannot be ruled out considering increase in earnings per share over last 2 years compared to previous years. If management declares higher dividend payout, stock will get rerated sooner than later.
Moreover, while looking at trading volumes, we find that stock is getting accumulated since last few months and is on the verge of giving strong upside in short term with positive news flow.
1. The company has registered lowest trading volume in NSE over last few weeks in past two years, similarly volumes are significantly low in BSE also. Recently the company recorded lowest daily volumes in last 2 years. This indicates that buyers are waiting for lower prices to buy however there is no seller also to sell the stock at current price.
2. Delivery percentage of shares traded has significantly increased over last 2 years. In 2017, the delivery percentage to trading volumes was ranging between 5% to 30% whereas now with similar or lower volumes during last few months (much lower volumes compared to last year), delivery percentage is ranging between 50% to 80%.
3. Some of the Institution / big investors have invested in the stock during last 12 months keeping a long-term view considering improved business fundamentals and higher earning visibility, hence availability of shares in market is decreased. In such a case, any positive news flow from company / management can bring significant upside in stock price in near term.
4. Technically, stock has already made a bottom in Feb 2019 and is now trading above its 50 EMA (Exponential Moving Average). We believe stock will move above its 200 EMA sooner than later and resume its uptrend delivering much higher returns over next few years. The stock has recently rallied around 30% from its recent lows, however stock price is still down by more than 50% from its high of last year.
5. The company’s stock price before announcement of Sept 2018 quarter results rallied by nearly 30% in 7 trading sessions. However, as company delivered results below street estimates, stock tanked giving up all its gain post results. We expect company to post much better results in March 2019 quarter and as stock is currently hovering at same price even after posting better numbers in Dec 2018 quarter, we believe it is already discounting all negatives at current level. Moreover, there is a possibility that before declaration of March quarter result, we may see pre-result rally once again like that of past.
To sum up, our recent recommendation under Potential 5-Bagger stock in 5 Years report is a great buy at current valuation and we presume it to be a wealth creator for our subscribers over next couple of years. The company not only offers significant upside in short term considering attractive valuations but also has the potential to create significant wealth by delivering upto 5x returns over next 3 to 5 years.
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The stocks we reveal through Hidden Gems & Value Picks are companies that either under-researched or not covered by other stock brokers and research firms. We keep on updating our members on our past recommendation suggesting them whether to hold / buy or sell stocks on the basis of company's performance and future outlook. Wealth-Builder is our offline portfolio management service under which we suggest higher investment allocation in selective small & mid caps.