With the Indian market recovering from huge losses resulting from the COVID-19-led pandemic, many investors are on the lookout for quality stocks available at a bargain. Given this, we have tried to identify the best low-priced stocks with future growth potential and zero debt in the small-cap space. To spot these companies, we have used our predefined "Quality Stocks Available Cheap" screener with the following filters:
- Altman Z-score: More than 2.99
- Piotroski F-score: More than seven
- Modified C-score: Less than four
- Earnings Yield: More than five per cent
- Price-earnings-to-growth (PEG): Zero to one
- P/E to median P/E: less than 1.5
- No debt
Starting its journey as an engineering company, Nesco has transformed itself into a diversified company with four business segments, namely Bombay Exhibition Centre (36.7 per of revenues in FY20); Nesco IT Park (49.6 per cent); Nesco Foods (8.2 per cent) and Indabrator (5.3 per cent).
The pandemic has affected a large number of companies across the globe, with Nesco being no exception. Since the company is involved in hosting social events and exhibitions, its revenues bore the brunt of the COVID-19 crisis. In the first quarter of the current fiscal year, the revenue from this segment fell by almost 100 per cent. Its food segment, which is directly related to the growth in the exhibition business, has also been under immense pressure. The Bombay Exhibition Centre has been converted into a COVID care centre by the Municipal Corporation of Greater Mumbai, which has washed out any significant revenue contribution from this segment in FY21. Besides, the newly launched Reliance Jio Convention Centre (JCC) has also been seen as a possible threat to its exhibition centre business.
However, the company's largest revenue contributor, its IT park, has not witnessed any fall in revenues. The revenue from this segment remained pretty stable in the first quarter of FY21, which witnessed a two-month-long lockdown across the country, forcing employees to work from home. Further, the management seems optimistic about the future and has not shelved its capex plans to expand its BEC and add another tower to its IT park, which it expects to pay through its internal accruals.
In terms of its financials, in the last five years, the company's revenue and profit has grown at a rate of 17.3 per cent and 16 per cent each year, respectively. It generated a decent average return of equity of more than 20 per cent during the same period, with an average profit margin of more than 48 per cent. The COVID-19-led crisis has battered the company's stock, which currently trades at a P/E of 15.5 as against its five-year median P/E of 19, which might see improvement as and when its business activity picks up.
Shree Digvijay Cement Co.
Involved in manufacturing cement and clinkers, the company markets its products under the brand name 'Kamal Cement'. Its product portfolio includes special types of cement like Oil-Well Cements (OWC), Sulphate-Resisting Portland Cement (SRPC) and Portland Pozzolana Cement (PPC), in addition to other varieties of Ordinary Portland Cement (OPC). The company has a fully computerised cement plant with a production capacity of 1.20 million tons per annum.
In 2019, the company's previous promoter, Votorantim Cimentos, which held close to 75 per cent, sold its stake to a private equity firm, True North, which currently holds 57.1 per cent of the company and the remaining is held by the public. The company's CEO & Managing Director, Mr Rajeev Nambiar, has been associated with ACC Cement for more than 20 years. Besides, Mr Anil Singhvi, Executive Chairman, has a relationship of 23 years with Ambuja Cement where his last-held post was the CEO and Managing Director.
The company operates in one of the most competitive industries in India, as India is the second-largest producer of cement in the world. No wonder, the cement industry will play a vital part in the development of the global, as well as the domestic economy. Although the company may be vulnerable in the short term because of subdued demand caused by COVID-19; however, a growing focus on infrastructure development is expected to increase demand for its products in the long term.
In terms of financials, in the last five years. the company's profit has grown at a rate of approx. 40 per cent per annum, with major improvements seen in the latest financial year because of higher market realisation, reduction in power and fuel costs and the optimisation of raw material costs as compared to revenue growth which was only 3.1 per cent compounded annually in the last five years. In the last financial year, the company paid dividends after a gap of 33 years. In the latest quarter, its revenues plummeted by more than 27 per cent because of the ongoing pandemic. Currently, the company has completely de-leveraged its balance sheet with zero debt as compared to a debt-to-equity ratio of 0.58 in FY16. Although the stock has nearly doubled in the last one year, it still trades at a P/E of 14.4 times as against its five-year median P/E of 21.2x.
Disclosure: The companies mentioned above are not our recommendations. If you intend to invest in any of them, do thorough research.