There are numerous drawbacks/risks/open questions with investing in this stock. Here is a list:
Despite profits going up from 2.5 to 5 crores in FY 19, the Trailing 12-month P/E is around 20. Price to book value is around 7. This is expensive.
Over the last 2-3 years, we have already seen microcaps rally due to increased profits and P/E expansion, however, when profit growth tapers down, price reduces drastically taking TTM P/E to single digits. A price reduction of 50% at the least has been seen over the last few months in numerous stocks. The same might happen with Meera.
The case for Meera has numerous open questions. What products does their machine manufacturing division actually produce? What is the market size for these products? Who are the major players locally and abroad? Looks like Meera has hit a niche opportunity, what exactly is it? Why is it sustainable and why should it be considered a moat, how can it enable growth? Making statements like the following means nothing:
“Meera’s machines cost substantially lower than European machines. On the other hand European machine will have some higher automation. Meera operates in the gap between the costlier European (high end) machines and low cost low end machines”
I read that Meera either makes technical textiles or makes machines that can help make technical textiles. That is hard to believe. There is another company, Fiberweb that makes technical textiles: They have spent 20 crores for machinery that can manufacture spun bond textiles, 20 crores for melt blown textiles and another 50+ crores for flat bond fabrics. While Fiberweb is a poor quality stock riddled with corporate governance concerns, the numbers spent on machinery cannot be far off from truth. Meera has net assets of 4 odd crores, what does it exactly do with respect to technical textiles?
Why do Meera’s machines cost lower? Is it because of low cost labour? Is it labour intensive ? If yes, how so? Material cost should not differ substantially between countries, so where is the competitive advantage?
While profits have doubled year over year, cash has not, because the incremental cash generated has gone towards increased working capital requirements (more inventory on books). Hypothetically, if Meera wants to expand, how will it fund expansion?
Let’s assume that profits double from 5 crores to 10 crores next year. P/E for today’s price as of next year will be 10. Can Meera grow from there? If not, expect a rapid correction in price. Today’s price is still expensive.
Look at the price and volume charts for a moment, around why timing is so important in illiquid stocks like Meera.
The stock was clearly manipulated upwards to around 400 in Feb 2018. (At around 400, a 2.5 crore profit (as of March 2018) generating company was valued at around 150 crores). Volumes were much higher as the stock price was going up. Retailers usually get attracted to rapid price increases with high volumes and high delivery rates. This is easily achieved by operators who buy and sell amongst themselves raising prices and delivery rates. Post the peak, stock hits daily lower circuits with abysmal volumes and within days, stock has lost 50% + from the peak. Even if one wanted to sell, one could not till a 40% drawdown occurred. This is not a good situation to be in. If one wants to park their money here, do get the entry/exit points right.
Also, why would anyone want to invest in stocks that are sub 100 crores in market cap and overpriced plus illiquid, when you have numerous midcaps and small caps that have corrected severely, and which can offer very good returns even in the short term? Even the bluest of the blue chips like Tech Mahindra can also give decent appreciation (plus dividends and buybacks), so the case for risky investments is not strong.
Finally with respect to technicals: The stock has consolidated between 175-225 for the last year. That could just be the operator accumulating stocks. So, an uptrend to 300-350 is not ruled out. But that will make the stock even more expensive and increase the risk of (not) being able to bail out on time.
On an unrelated note (not related to Meera), there are just 2 reasons for investing in a micro/nano cap, according to me: a) You get a very low price (Heads I win, Tails I do not lose much kind of a situation) while technicals support and you understand the dynamics behind potential future revenue growth. b) You know the promoters personally very well and can vouch for their integrity and competence (Integrity first priority and competence next). But then again, that’s just me.