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Sunday, November 3, 2019

Investing in Secular Growth Stock with 5-Bagger Potential

Dear Reader,

Wealth Creation
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 followed by extreme pessimism in market due to IL&FS default, squeeze of liquidity, NBFC crisis and collapse of well known companies like DHFL, Cox & King, Sintex Plastics, ADAG companies etc due to excessive over leveraging & high debt on books. From peak levels of Jan 2018, mid cap and small cap stocks have witnessed severe correction over the past 20 months in spite of many small and mid size companies delivering better bottom line compared to large caps.

While major index Sensex hits life time high and Nifty is just few percentage away from its peak delivered returns of 19% (33,813 to 40,248) and 15% (10,435 to 11,917) respectively since 1st Jan 2018, BSE Mid Cap and Small Cap index is still down delivering negative returns of -17% (17,836 to 14,724) and -30% (19,280 to 13,310) respectively during the same period. With divergence of ~49% 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.

Economic Revival will lead to Outperformance of Mid & Small Caps in FY 2020-21

With GDP growth falling to 6 years low of 5% in the June quarter, equity funds continue to shift their preference towards selected large / mega caps where there is certainty of earnings & growth, also termed as quality by market experts.

Fund flows in equity market over last 2 years have taken risk off mode where certainty matters the most irrespective of expensive valuations of these companies. Hence, we have seen Nifty / Sensex touching new highs this year (due to the rise in stock prices of handful of companies having high contribution in index) where as broader indices i.e. BSE Mid & Small Cap Index sliding down further making new 52 week lows this year.

Due to fear and extreme pessimism in the stock market, we have seen money chasing quality stocks since Jan 2018. However, once we see the economic revival, market will turn quickly to risk on mode and we will see funds flowing back to mid and small caps available at historically low valuations. We believe underpriced moderate growth stocks will deliver far superior returns than overvalued high growth stocks in coming years. Current undervaluation of many of our recommended stocks give us further comfort to keep on holding & accumulating them during these painful period.

Investors participation in broader market is expected to improve significantly with initial signs of revival in GDP growth. That spells opportunity, as many good 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.

Small Size Company - A Secular Growth Stock with 5-Bagger Potential

We are pleased to inform you that during these opportune times, we picked one of 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 made significant investments increasing its capacity over last couple of years and continue to do so during this year as well. By end of FY19-20, the company will have nearly 3 times capacity of its FY18-19 annual sales with current debt to equity ratio of 0.5.

4. The company has robust fundamentals as it enjoys strong cash flow from operationIts 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 comfortable debt to equity ratio to support future growth.

5. The company is a small cap company with market capital to sales ratio below 1, 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 20 months, the company is now available at decade low valuations. 

6. The company is paying dividend every year and dividend yield is maximum at current price compared to all other listed players in the Industry. The company has recently paid dividend for FY18-19. Moreover, possibility of higher dividend payout for current financial year cannot be ruled out considering increase in earning estimates compared to previous years.

Also, while looking at trading volumes and shareholding patterns, we find that stock is getting accumulated since last couple of quarters and is on the verge of giving strong upside in short to medium term with positive news flow / quarterly results.

1. The company has registered lowest trading volume in NSE over last few months in past two years, similarly volumes are significantly low in BSE also. In last few months, the company recorded lowest daily volumes in past 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. 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.

3 Total no. of shareholders continue to reduce over last few quarters indicating that weak hands (small retail investors) continue to exit selling their shares to strong hands (HNIs / Institutions) confirming accumulation of stock at current levels. 

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.

To receive our potential 5-Bagger stock along with the detailed research notes and relevant follow-up updates, you can subscribe to our Hidden Gems, Value Picks or Wealth-Builder service.

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 having strong fundamentals to build a robust and diversified portfolio.

Be a disciplined investor who keep on investing in systematic way irrespective of market conditions and not an emotional investor who usually buy stocks during bull phase when stock prices are moving higher because of greed and sell them in panic during bear phase due to severe fall in stock prices, making mistake of buying high and selling low.

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Wish you happy & safe Investing. 

Team - Saral Gyan