A wave of turbulence seems to have swept across the global market, with the Indian stock markets being no exception. While a cloud of uncertainty is hovering over trade talks between the US and China, volatile crude oil price - coupled with increasing US fed rates and a slow-paced global economy - is weighing heavily on the markets.
Against this backdrop, the move made by investors is crucial, if not essential. Warren Buffet once said, "Be fearful when others are greedy and greedy when others are fearful." Going by his words, it is probably the best time to separate men from boys and prepare your wish list of desired stocks. After all, shouldn't you hit the gas pedal as hard as you can when the opportunity strikes?
We have analysed four small-cap stocks that have corrected substantially over the past one year. Also, we have used some stringent filters and all these stocks cleared these filters, too. Besides, these stocks are trading at a price that makes sense - they are trading at a discount to their five-year median Price to Earnings (PE).
a) Price correction in last 1 year > 30%
b) One-year EPS growth > 30%
c) Last three-year average ROE > 15%
d) Debt to equity < 1
e) Current PE < Five-year median PE
And here are these companies.
NOCIL: The largest rubber chemical manufacturer in India, it enjoys a market share of 45 per cent in India and a market share of five per cent across the world. The company manufactures accelerators, anti-degradants/antioxidants and specialised applications at its two plants in Navi Mumbai and Dahej (started in 2013).
To accelerate its growth, the company has designated a total capex of Rs 425 crore, out of which Rs 170 crore has already been spent. The remaining capex is expected to be utilised by FY20. Thereafter, its total production capacity is likely to double.
For rubber chemical, the global industry has significant dependence (at around 70-75 per cent) on China. However, recent pollution control initiatives in China have led to supply disruption. It has ultimately paved the way for NOCIL to strengthen its position in the global supply chain of rubber chemical, thereby providing a major fillip to its exports. Further, the ongoing trade war between the US and China is expected to boost the company's exports in the coming time. However, declining domestic auto sales and volatile crude oil price are two major concerns for the company.
While its trailing three-year sales grew by 13 per cent in March 2019, its profits grew by more than 30 per cent during the same period. The company has recently focused on maintaining margins instead of going for higher sales. The stock has corrected by more than 40 per cent over the last one year and currently, trades at a PE of 10.6x as compared to a five-year median PE of 15.6x.
Bharat Rasayan: The company manufactures technical-grade pesticides, such as fenevalrate and cypermethrin and intermediates, such as meta-phenoxy-benzaldehyde (13 per cent of its March 2018 revenue). It owes its success to identifying and manufacturing the generics of off-patent agrochemicals pesticides, insecticides, herbicides and fungicides. The company has two manufacturing plants at Mokhra village (Rohtak, Haryana) and Dahej (Bharuch, Gujarat).
It sells its products primarily to MNCs and large agrochemical companies within and outside the country. Since the bargaining power of its customers is quite high, the company has a long working capital cycle (FY18: 101 days).
At present, the company is undertaking an Rs 100-crore backward integration and expansion plan for its Dahej plant. Besides, it has acquired land at Saika, Gujarat for further expansion. These two drives are expected to reduce its dependence on China for raw materials.
Over the last three years, its sales grew by 26.8 per cent, while its debt to equity reduced to 0.4 times from 1.2 times. The company has maintained an average three-year Return on Equity (ROE) of 32 times. Its stock has corrected by more than 30 per cent over the last one year and currently, trades at a 14.4x as compared to a five-year median PE of 16.6x.
Jamna Auto: It is the second largest manufacturer of leaf springs, an essential component of the suspension system in a commercial vehicle, in the world. The company ranks number one in the domestic original equipment manufacturer (OEM) space, with a market share of 69 per cent. Besides, in the Rs 3,000-crore domestic leaf springs replacement market, it has a strong presence (15 per cent market share) too. Further, in the parabolic springs category (new-age products), the company commands a market share of 90 per cent in the OEM space in India.
Its 11 manufacturing facilities are located close to automobiles hubs, enabling it to cater to customer requirements in a time- and cost-effective manner. Over the years, the company has been able to maintain its technical expertise by teaming up with various international players, in addition to working on its in-house R&D capabilities.
The demand for leaf springs is directly proportional to the demand for medium and heavy commercial vehicles. The government's infrastructure push, better road connectivity and a growing emphasis on the rural sector are some tailwinds for the company. However, the slowdown of the Indian economy, coupled with muted auto sales due to regulatory changes like enforcement of BS VI norms, puts a damper on its growth trajectory.
Its sales have witnessed a Trailing Twelve Month (TTM) CAGR of 22 per cent and net profit of 37 per cent in the last three years, while its three-year average ROE has been 34 per cent during the same period. However, high contingent liabilities of Rs 191 crore (~45 per cent of equity in March 2018), along with a nine-fold increase in its short-term borrowings (from Rs 23 crore in March 2018 to Rs 208 crore in September 2018), remain a concern for the company. Its stock has corrected by 45 per cent over the last one year and currently, trades at a PE of 13.4x as compared to a five-year median PE of 20.3x.
Meghmani organics: As a diversified chemical player, the company has a presence in three business segments-1) Pigments (34 per cent of the total revenue in March 2018; global market share of 14 per cent), 2) Agrochemicals (31 per cent) and 3) Basic Chemicals (32 per cent; the fourth largest caustic chlorine producer in India). Its basic chemicals business is managed by its subsidiary, Meghmani Finechem. The company has spread its foothold in more than 75 countries and operates through seven facilities in Gujarat. Its exports and domestic sales contribute almost equally to its total sales.
Its raw materials prices are dependent on crude oil price, while 9-15 per cent of its total raw materials are imported from China. These two factors, along with its relatively low bargaining power in the export market, leave a negative impact on its margins. Over the years, the company has been able to reduce its long-term debt and currently, it is executing a capex plan of Rs 6.5 bn to expand its high-margin basic chemicals business segment.
Over the past three years, Meghmani has increased its consolidated profit by 47 per cent, along with improving its operating margins to 27.7 per cent as of December 2018 as compared to its past three-year average of 22.8 per cent. It resulted in an ROE of 33.6 per cent in December 2018 as compared to a three-year average ROE of 22 per cent.
Its stock is currently trading at a PE of 6.5x as compared to a five-year median PE of 11.9x. Over the last one year, its stock has corrected by 40 per cent.
#Price data as of 14/5/2019.
Disclosure: The intent of the article is not to recommend any specific stocks. If you wish to invest in any of the above-mentioned securities, please do thorough research.