Stock Ideas

Contrary bets by FIIs and MFs in small caps

Two small-cap companies wherein MFs have increased while FPIs/FIIs have decreased their holdings

Contrary bets by FIIs and MFs in small caps

When it comes to investing in the Indian market, domestic investors (mutual funds) and foreign portfolio/institutional investors (FPIs/FIIs) often take contrary stands. For example, during the meltdown in March when the BSE Sensex fell by more than 30 per cent, FIIs were record sellers, selling shares worth more than Rs 65,000 crore, whereas equity-oriented mutual funds put in more than Rs 11,000 crore.

While this tug of war continues between them, we have analysed here small-cap stocks that have seen the contrary trends over the last three months. From a list of around 622 small caps, two companies saw the shareholding of mutual funds increasing by more than two per cent points, whereas that of FPIs/FIIs decreasing by two per cent points from March to June 2020. The first company is a global coffee manufacturer and expected to benefit from higher in-house coffee consumption, while the second one is an auto ancillary company and expected to benefit from a V-shaped recovery in the auto sector.

CCL Products (MFs: +2.9 points, FIIs: -2.4 points)
With people staying more at home, in-house coffee consumption is on the rise. This company's domestic business, comprising Continental coffee brand, witnessed a 40 per cent rise during Q1 driven by rising retail consumption, albeit from a low base. Stable manufacturing processes in Vietnam and Switzerland enabled the company to counter disruption in its Indian facility. After managing supply-side constraints well, it is now focusing on increasing customer engagement and launching new products. The company registered revenue growth of six per cent and profit growth of 11 per cent YoY during Q1.

Primarily a contract manufacturer of coffee for global instant brand retailers and private label marketers, CCL Products exports its coffee to more than 90 countries across the US (20 per cent of revenue), Europe (20 per cent) and Russia & CIS (25 per cent). On the supply side, it enjoys economies of scale with a capacity of 3500 tonnes of instant coffee and 5000 tonnes of coffee products. With manufacturing located across Vietnam (the second-largest producer of green coffee beans), India and Switzerland, it can cater to different sets of customers while ensuring the smooth supply of raw materials. Strong and long-term relationships with customers, low forex risk because of both sales and procurement in USD, the nil-tax regime for Vietnam operations and superior technical know-how are some of the competitive advantages that the company enjoys.

In the last five years till March 2020, its average ROE stood at 22 per cent, while its debt-to-equity ratio hovered at around 0.5x. Benign green coffee prices since 2018 have resulted in an improvement in its operating margin. Lastly, the company managed to produce positive free cash during the last five years, even as it has been on an extended capex cycle. The stock currently trades at a P/E of 20 - just little shy of a five-year median of 23.4.

Suprajit Engineering: (MFs: +3.8 points, FIIs: -5.3 points)
With the economy coming back to a normal state, the auto and ancillary sector is expected to rebound swiftly. Since social distancing has become the norm, people are expected to commute more in private vehicles. In addition to this, a robust rural economy is expected to provide a big fillip to two-wheeler sales in rural and semi-rural places.

Suprajit Engineering, a leading manufacturer of auto and non-auto cables (82 per cent of the FY20 revenue) and halogen lamps (18 per cent), is well placed to leverage this trend. Over the years, the company has grown through successful acquisitions (Phoenix lamps in 2015, Wescon Controls in 2016 amongst others), with the latest one being the halogen plant of Osram in 2019. If we ignore the last two years (FY20 and FY19), which have been especially challenging for auto companies, Suprajit was able to maintain an ROE of above 20 for several years. The company enjoys economies of scale with a production capacity of 30 crore cables and 11 crore bulbs per year at its 21 manufacturing plants.

In the last five years ending March 2020, it managed to give an average ROE of 20 per cent, with the total debt to equity now coming down to 0.45 from 0.7 in March 2016. With no major capex planned for the next two years and the expectation of an improving market, the company is likely to reduce its debts or pay more to its shareholders in the form of dividends. The stock currently trades at a P/E of around 23, taking into account FY-20 earning per share as compared to its five-year median of 33.

Disclosure: The companies mentioned above are not our recommendations. If you intend to invest in any of them, do thorough research.

Other Categories