Small-cap growth stocks available at attractive prices

Promoted by legendary Fidelity manager Peter Lynch, head of the magellan fund, growth at a reasonable price (GARP) is an investment strategy based on the principles of both value and growth investing. Combining both growth and value investing, GARP focuses on those companies that have maintained consistent growth while leaving aside the ones with high valuations. Emphasis is given on the companies having a relative margin of safety (the difference between the intrinsic value of a stock and its market price). Value investors do not believe that the market is efficient and therefore, it is possible to find undervalued stocks.

At the time when small-cap stocks have taken a beating, it can be easy to find underpriced stocks. Here are the filters we used:

• Market cap more than 500 crore
• EPS (Quarterly) - YoY Growth: more than 20 per cent
• EPS - One-Y Growth: more than 20 per cent
• EPS - Five-Y Growth: more than 20 per cent
• Price to Earnings: One to 15
• Five-year Median ROE more than 12 per cent

Fairchem Speciality
Part of the Fairfax Group of Canada that has 45 billion dollars of assets under management, Fairchem Chemicals is a speciality chemicals producer catering to various industries ranging from adhesives and paper coatings, paints, pharmaceuticals and FMCG. The company claims to have perfected the business model of procuring waste generated in oil refining mills and using it to process a variety of components. Some of these components are used as building blocks of many value-added products. Three types of chemicals it manufacturers include:

• Oleochemicals - these are biodegradable chemicals produced from natural sources. Their demand mainly comes from industries like printing inks, adhesives, paper coatings, etc.
• Nutraceuticals - derived from two words - nutrition and pharmaceutical, this chemical is used in pet food, pharmaceuticals, cosmetics, etc.
• Aroma chemicals - blended to develop a particular flavour or fragrance, these chemicals have applications in various products like air fresheners, detergents, cosmetics, fragrances, soaps, etc. Exports contribute significantly to its sale.

India happens to be the seventh largest chemicals producer across the world and the third largest producer in Asia (in terms of output). The chemical industry is expected to double to $3 billion by 2025, registering an annual growth rate of 15-20 per cent. The government is also working on a chemical policy that will ensure this growth and assist in meeting the rising demand and reduction in imports.*

Coming to the financials, debt increased to Rs 490 crore in FY19 as compared to Rs 330 crore in FY18. This took the debt to 0.85 times of equity as compared to 0.67 times a year back. In addition, its short-term borrowings - which form a major portion of the total debt - stood at Rs 280 crore during the same period. The stock currently trades at 12 times, which is above its five-year median of nine times.

Deccan Cements
Founded in 1979, Deccan Cements is the manufacturer of a wide variety of cements, including speciality cements which cater to special needs of strength for the construction industry. In addition, the company has its own captive limestone mine. Limestone is the basic raw material in the production of cement and having its own captive production assures the uninterrupted supply of good quality limestone. It also has its own captive power plant.

India is the second largest cement producer in the world. However, the industry is significantly concentrated with the top 20 players, accounting for 70 per cent of the total cement production. There are around 210 large plants, which have a production capacity of 410 million tonnes. 77 of these plants are located in Andhra Pradesh, Tamil Nadu and Rajasthan. This company's plant has a capacity of 2.3 million tonnes per annum and is located in Bhavanipuram, Andhra Pradesh.

The industry has a lot of scope because of the government's push for infrastructure and its ambitious plans, such as smart cities and housing for all.

Coming to the financials, volumes grew 18.5 per cent in FY19. However, sales grew only 12 per cent owing to lower price realisation. Earnings have grown at a three-year CAGR of 11 per cent. Debt has remained low, with debt equity current only at 0.13 times. The stock currently trades at eight times, which is lower than its five-year median of 15 times.

Source:
* https://www.ibef.org/exports/chemical-industry-india.aspx

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.