In these two mid-cap companies, both FIIs and MFs increased their stake significantly
21-Feb-2020 •Rajan Gulati
When it comes to investing in the Indian market, foreign investors (FIIs/FPIs) and mutual funds (MFs) usually take different approaches. Out of a list of 183 mid-cap companies picked by our filter, only 40 companies witnessed an increase in stakes by both FIIs and MFs during the last quarter (September to December 2019).
Going a step ahead, we delved deep to identify companies wherein both FIIs and MFs increased their stake at least by 1.5 per cent. Surprisingly, we came across only two such companies wherein both reposed their confidence. Here are them:
Creating a distinct identity from the now beleaguered Thapar business group in 2015, this leading electrical engineering company of India has a significant presence across fans, pumps, LED lights and appliances like geysers and coolers. Promoted by private equity firms and managed professionally, Crompton is the number-one player in fans and residential pumps, with a market share of 23 per cent and 28 per cent, respectively. It has two product segments: electric consumer durables (ECD; 72 per cent of the Q3FY20 revenue) comprising pumps, fans and others and lighting products (28 per cent) comprising LEDs. The company has a pan India network of more than 3,500 distributors.
Together, the company's products, including fans, pumps, lighting and appliances, have a market size of Rs 40,000 crore. Favourable demographics, the government's push for housing for all, rising disposable incomes, increasing urbanisation and low penetration of consumer durables in the country are some growth factors for the company.
Going forward, the company intends to maintain its stronghold in fans and pumps while focusing more on LED lightings, coolers and geysers. In the last three years till December 2019, its revenues grew by six per cent YoY and profits grew by 25 per cent on the back of lower depreciation expense and lower tax rate. But the company's ROE stands at around 47 mainly because of higher financial leverage. Another key point to consider is the promoter pledge which stands at 97.7 per cent of the total holding by one of the promoters. However, the company trades at a PE of 34, which is its lowest in the last three years.
The solution bouquet of this integrated business service provider comprises recruitment, staffing, skill development, payroll, BPO and other related services. It derives revenues from three segments;
a) workforce management (59 per cent of the FY19 revenue) comprising general staffing, IT staffing and skill development
b) Operating asset management (20 per cent) comprising industrial, facilities and telecom-asset management
c) Tech services (21 per cent) comprising business process management services, IT services and Internet (Monster.com).
With an employee base of 385k, the company has over 2,450 enterprise clients across IT/ITeS, education, industrials, BFSI, real estate and other sectors. Although several Indian companies provide business services to western companies, the domestic market is still under-penetrated, with the penetration of business services being only two per cent. In India, this industry is expected to be at ~$59 billion in FY20. Further, various factors like skill shortage, light-bench strength, variable employee expense to control margins and uptake of technology are expected to drive the sector forward.
In 2019, the company got demerged from Thomas Cook India and came under the direct ownership of Canada-based insurance/investment company, Fairfax. In the last three years till December 2019, it grew its revenue by 36 per cent, while its operating margin improved only a little to six per cent as against a little more than five per cent in December 2016. The company's cash conversion cycle remains stable at around 32 days. On the other hand, its balance sheet improved as its debt to equity reduced to 0.3 in March 2019 from 1.1 in March 2016. The stock currently trades at a PE of 30.7 as compared to its three-year median of 41.7.
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.