Companies with less institutional holdings
Here are three companies wherein institutions hold less than 10 per cent stake
By Jugal Harpalani | Jun 17, 2019
Retail investors usually track institutional holdings, owing to their investment acumen. Over the years, a few highly rated mutual funds have outperformed the benchmark consistently. Strong institutional interest in a company indicates the company's fundamental strength and good prospect. Hence, when institutions pick up large stakes in a company, it does put the company on the radar of quite a few investors.
However, we have tried looking for the companies that may have been overlooked by the institutions (both foreign and domestic). We have first filtered out those companies wherein these institutions held less than 10 per cent stake as of March 2019. And then, we have applied some quantitative filters:
Filters applied :
1. Sales and earnings annualised growth over five years greater than 15 per cent
2. Five-year median ROCE above 15 per cent
3. Debt/Equity less than one
This has resulted in a list of 18 companies, clearly dominated by mid and small cap companies. Some noteworthy ones include L&T Technology Services, Avenue Supermarts, Abbott India, to name a few. We have then decided to run a qualitative filter of free cash flow. We have zeroed in on those companies in the list that have generated positive free cash flow consistently in the past five years and come up with a mere five companies of which, three have been trading at or below their five-year median PE. These companies are as follows:
Founded in 1984, it is involved in manufacturing and marketing different types of chlorophenol, which is a chemical used as an intermediary in several agro-chemical products, pharmaceutical products, dyes, cosmetics and veterinary drugs. Its manufacturing facility in Gujarat has an installed capacity of 4,800 metric tonnes per annum, which the company is planning to expand in the coming years.
India happens to be the seventh largest chemicals producer across the world and the third largest producer in Asia (in terms of output). In addition, India ranks third across the world in the production of agrochemicals and contributes around 16 per cent to the global dyestuff and dye intermediaries production.*
In terms of the company's financials, its earnings and sales have registered an annualised five-year growth of 71 and 74 per cent, respectively. The company is net debt free as well. It is currently trading at a PE of eight times as compared to its five-year median of 42 times.
Caplin Point Laboratories (CPL)
It is involved in selling ointments, injections and generic pills in the semi-regulated Central American and African markets (82 per cent of FY18 revenue). The company made a foray into the tougher and unknown Central American markets in the early years, which now account for a majority of its revenues. Recently, CPL has ventured into the sterile injectable market and received approval from the US FDA in 2017 for its sterile liquid injectables factory located in Tamil Nadu (India). Sterile injectables are a form of medicine delivery mechanism, which may be used over and above the conventional solid (Capsule, tablet etc) delivery. According to the FY18 annual report, CPL started delivering injectables in the US market through its partners. Going forward, it plans to meet the supply shortfall of sterile injectables in the regulated markets of the US, Europe and Russia.
CPL has two manufacturing facilities in Tamil Nadu (India); however, a majority of its sourcing comes from outsourced medicines from China. What has worked for the company is its early move in the Latin American markets, as these markets were too small for big pharma players and too risky for smaller ones. CPL has performed fairly well in the past, with five-year sales and earnings growing at an annualised 32 per cent 54 per cent, respectively, along with improving operating margins and positive free cash flows for the past five years.
A concern that came across was that its trade receivables increased drastically to Rs 160 crore in FY19 as compared to Rs 33 crore in FY17, without any meaningful increase in short-term borrowings. In line with an increase in trade receivables, sales have increased by 61 per cent in the last two years, but the cash realisation has been poor. The company currently trades at a PE of 18.26 times as against five-year PE of 31.7 times.
As a leading player in animal healthcare, it is involved in four verticals, namely poultry vaccines, animal vaccines, poultry health products and animal health products. The company has a wide portfolio of 50 health and 49 vaccines designed to address various preventive, curative and growth requirements of poultry and large animals. In addition, it provides services for poultry farms and cattle farms. Its exports, which it plans to increase but has not been able to as planned, currently contribute eight per cent to its total revenue.
Coming to its financials, the animal healthcare segment showed a significant jump in FY19, with a sales increase of 98 per cent and profit before tax increased 78 per cent. However, it resulted in a reduction in its dependence on the poultry healthcare division, as the animal healthcare division contributed 27 per cent in FY19 as against 13 per cent in FY18. Even though the company's debt increased, debt levels in FY19 remained the same at 0.45 times of equity due to a subsequent increase in equity. The stock is currently trading at its five-year median of 38 times.
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.
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