For a column that has consciously written on chhota caps, this edition is positioned as an orgasm. I have dedicated it exclusively to small-caps with an equity capital of no more than Rs 5.40 crore (arbitrary!) with the confession that when things go wrong they sure become invisible, but with the conviction that when the horoscope changes they make their owners wealthy. Not rich, wealthy.
Two stocks can vouch for my argument.
In exactly 12 months, Alphageo has appreciated to Rs 800. A back-of-the-envelope scribble indicates that perhaps the company is trading at a PE of 25 for current year results (my estimates, which could be highly conservative), reflecting an optimism that might be prefixed with 'highly' but then there is always some research report that is building a case around 2008-09 and 2009-10 results and pressing for increased exposure. Chalo, yeh bhi sahi.
The bottom line declined from Rs 2.3 crore in the September 2006 quarter to Rs 0.11 crore in the June 2007 quarter. And then something curiouser happened: the stock jumped to a high of Rs 986.
So on the basis of this loaded evidence -- loaded because, crafty as I am, I have conveniently omitted to mention hundreds of other companies that lost their profits, prices and visibility -- permit me to suggest that since institutions would rather look at biggies, you get no competition prospecting these smallies; they move real slowly because for a long while nobody is really interested; when results look up the world looks the other way; then suddenly someone writes a research report, the price moves a little; then another research report, then a few more investors move in; the stock crosses a tipping point, the world moves in; institutions buy a stock at Rs 400 that they have shunned at Rs 40, the PE grows faster than the EPS -- and then you can die in the confusion of whether you should tan yourself at Bondi or Copacabana.
Ah, now I have you selfishly hooked
Jay Ushin (equity: Rs 3.86 crore, price: Rs 90.70): Engaged in the manufacture of lock key sets, door latches and heater panels. Enlisted as a supplier to leading automobile brands.
Low margin, volume-driven business. Turnover has risen every single quarter over the last five quarters - from Rs 34.86 crore in September 2006 quarter to Rs 55.71 crore in September 2007. EBITDA margin relatively steady at around 6 per cent. The company reported an EBITDA of Rs 3.32 crore in the most recent quarter with an interest cover of around 5.
What I like about the company: a sizable depreciation provision of Rs 1.13 crore in the last quarter, which provides the company with adequate ammunition to enhance capacity (and revenues) sustainably without diluting the equity. At a market cap of Rs 35 crore, the market is obviously overlooking the value of the technical collaborator, profitability and customer alliances. Temporary.
Indag Rubber (equity: Rs 5.25 crore, price: Rs 101.50): Engaged in the manufacture of pre-cured tread rubber. Increased EBITDA margin in every single of the last five quarters. Increase in earnings in every single of the last five quarters.
Last reported numbers (second quarter 2006-07): total income of Rs 19.58 crore, EBITDA of Rs 3.40 crore and a net profit of Rs 2.68 crore. Market capitalisation: Rs 52.50 crore. What I like about the company: strong retread brand, increasing revenues, interest cover in excess of 10 and tax hedge (locational advantage).
Shakti Met-Dor (equity: Rs 2.75 crore, price: Rs 318.70): Engaged in the fabrication of customised industrial doors. Focus on utility and aesthetics. Graduated beyond mere door delivery to ironmongery and installation.
This is what I like about the business: Average capital employed of Rs 30 crore in 2006-07 and an EBITDA Rs 17.5 crore, interest cover at 42 times, a debt-equity ratio of 0.22 and a 34 per cent tax rate. Shakti reported revenues of Rs 19.34 crore in the September 2007 quarter with an EBITDA of Rs 5.22 crore, an EBITDA margin of 27 per cent and post-tax bottom line of Rs 3.23 crore.
What excites me is: The company is engaged in enhancing its installed capacity from 60,000 per annum (annual report 2006-07) to 200,000 units effective from June 2008 through accruals and debt.
If you are willing to overlook that the stock has done a rope trick of late and that growth this year may be relatively modest and 2008-09 could at best be fair, then watch out for 2009-10 The management reckons it will have potential revenue ammunition of around Rs 200 crore. Given you enough clues to work on.
Akar Tools (equity: Rs 5.40 crore, price: Rs 50.60): Engaged in the manufacture of hand tools and leaf springs. Increase in revenues in every single of the last four quarters. EBITDA appears to be stabilising around 10 per cent. EBITDA has been inching close to Rs 2 crore in each of the last two quarters.
The management estimates revenues of Rs 80 crore for the current fiscal and Rs 130 for 2008-09. Market capitalisation Rs 27 crore. If it can pull this off without altering its equity structure or EBITDA margin, there could be a game on our hands.
Vamshi Rubber (equity: Rs 4.20 crore, price: Rs 34.45): Engaged in the manufacture of precured tread rubber. The numbers may be minuscule but tarry a while my friend, there is a pattern emerging: EBITDA has grown in every single of the last five quarters from a trough of Rs 39 lakh at one end to Rs 1.22 crore at the other, increase in EBITDA margin in every single quarter from a low of 3.7 per cent to 10 per cent and a consistent increase in interest cover from sub-3 to around 8. Tax rate of 20 per cent appears fair. Basic and diluted EPS in the last quarter: Rs 1.58. Market capitalisation: Rs 15 cr. Potential.
Patels Airtemp (equity: Rs 5.07 crore, price: Rs 136): Engaged in the fabrication of heat exchangers and chilling systems. Something has happened in the most recent quarter: a company whose best quarter had in the past been Rs 2.35 crore, now reported Rs 3.33 crore, the tax rate was a hefty 32 per cent (there is cash in the till, my friend) and interest cover was more than 16 (effectively debt-free).
With a modest extrapolation of this quarter, you have a post-tax EPS of Rs 12 for this year and possibly Rs 16 for the next. A market cap of Rs 70 crore is not cheap in my kanjoos book, but the number to watch will be the order book. If the company manages a breakthrough on that front, then there is still hope for Copacabana at the time of the next Carnival.
Mudar Patherya heads Trisys, India's largest annual reports consultancy. Owns every single stock reviewed here (except Borosil Glass).
