Hello Sir,
Hope you are doing well.
Yesterday, we released our new stock recommendation for our Alpha and Alpha + Members and would like to share with you details on the same.
We focus on growth oriented small-mid cap companies that are trading at reasonable valuations and invest with a horizon of 3-4 years.
The one shared yesterday fits our framework as despite being a sub 500 crore market cap stock, it’s one of the largest players in its segment, has good operating performance track record, deleveraging balance sheet and available at only ~6 times post-tax earnings.
Key points about the company:
- Growth – It has grown its sales at around 10% CAGR and reported ~300% growth in PAT in the last few years
- Product mix – The management is focused on increasing contribution of value added and specialty chemical products in the overall product mix
- R&D – In one of the subsidiaries focused on value added products, in FY 22, the company spent 4.34% of sales on Research and Development
- Captive sources of raw materials – The company has captive sources of raw materials from which it sources 30-40% of its total requirement, giving it a cost advantage over others
- Cash Flows – The company has consistently maintained strong operating cash flows in line with the reported profits
- Debt – On the back of strong cash flows, the company has been able to reduce absolute debt by more than 30% over the last few years and bring down debt to equity ratio from 3.00 to below 0.50
- Valuations – Available at only ~6 times post-tax earnings. Over the last 5 years, the stock has traded largely between 4 times to 12 times earnings
- Promoters – Technocrat promoters with skin in the game. Currently, 2nd generation of the family is involved in the business
- In the last few years, one of the Independent Directors bought shares of the company around the same price we have recommended it to our members
What makes the stock interesting from the perspective of next 3-4 years is that the company has deleveraged the balance sheet, its credit rating has improved, and the management is focusing on value added and specialty chemical products which should be margin accretive.
Further, due to the correction in the small cap stocks in the last 1 year, the stock is down 40% from the highs, while the business fundamentals have improved; thus, making the stock available at very reasonable valuations.
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