I just started posting on this forum today. Found it very interesting. I am a professional with more than 10 yrs experience working in a multi billion dollar fund abroad mainlyfocusingon US equity. I make investments in small caps in my personal portfolio and i am here to share my views and benefit by hearing others views.
My Picks: Will first post two today and post the balance later on the same thread.
AK Capital Services
a. At this price trading at TTM PE of below 2 and Price to Book of below 0.25 and dividend yield of 5%.
b. Legendary invest RK Damani, Guru of Rakesh Jhunjhunwala, holding 1.3% stake in company which he bought in March 2013 qtr.
c. FORBES included it in Asia’s 200 fastest growing companies.
d. Promtoer bought 10% of total capital from open market from Mar to May 2009 which shows their confidence in the company.
e. RBI introduced Base rate system since july 2010 according to which banks can not lend below a certain rate… So base rate system increased the cost of bank borrowings for corporates… So more and more corporates are going for money raising through Bonds instead of bank borrowings… what I said above is also evident from the Primedatabase link below in which private placement of bonds is showing a huge increase since 2010.
f. Entry in this sector is not easy as it requires a Brand value… AK Capital has a strong brand value in market and no new player can come so easily.
g. In last 2-3 years, AK Capital invested a lot of internal accrual in its subsidiary AK Finance ltd which will start contributing to its bottom line now.
Many of you may wonder what is so special about this company and why I am so bullish on this… I will like to tell you that there is a special thing about this company… That special thing is that there is no risk involved by investing in this share, even if India GDP tanks to 3%…!!.. I will tell you why… If India GDP stays at these low levels or even it goes further down, that low growth will bring the inflation down and RBI will be forced to cut rates to support growth which in turn will bring the bond yields down which in turn increase the bond prices up which in turn will result in capital gains for AK Capital’s huge bond holding of 500+ crores… And if India GDP goes up from here, that will result in increased fund raising activities which will result in more merchant banking fees for AK Capital… So it is an extremly safe bet wherever economy goes… No other company has this kind of safety (barring defensive sectors like FMCG which are trading at high valuations)… All other small cap stocks are closely linked to GDP growth… If GDP tanks, small caps are the first to be affected… If GDP goes up, Small caps are the first to be benefitted…You will not believe but in March 2013 quarter, more than 2,000 companies posted net loss… If suppose there are approx. 8,000 listed companies in india, that means 25% companies posted loss in this quarter…!!.. I think this 25% is all time high figure … Amongh these 2,000 companies, 1,600 companies are those whose market cap is less than 100 crores… what I am trying to say is in India, small cap stocks are in a very bad situation because of GDP tanking to 5%… But AK Capital is not in problem because of reason explained above… So those who want to invest in small cap stocks but also do not want to take the risks associated with small cap stocks, should invest in AK Capital Services (BSE 530499)… There is no certainty about other small cap stocks… any good looking small cap stock can come in loss making list any time because of low GDP (low demand)… But AK Capital is very safe bet whichever side GDP growth of India goes from here…Happy Investing…!!
Disclosure - AK Capital is the biggest constituent of my portfolio.
2). First Leasing company of India:
Broadly both the promoters Irani (MD) & Mutthiah (Chairman) are 70+ and as per highly reliable sources they have been trying hard to sell the company as Irani has only daughters and Ashwin mutthiah has settled down in Singapore and has shown no interest to manage the show. Got an offer at 120 very recently but they rejected it as it was below book value and they want minimum 200 Rs. which would make it a 7 bagger. Heard that they are scouting for buyers and may find one in the next 12-18 months.
Current market price Rs. 32 (cum 1.8 Rs dividend) and book value Rs. 160 and EPS of 15 trading at a PE of 2 and dividend yield of close to 6%. Profitable in every year with steady growth and no major hiccups since its inception in 1974 and never missed paying dividend to shareholders from 1975. Close to zero net NPA as they are very conservative and lend only to highly credit worthy lenders on very conservative terms. Also Capital Ratio of 20% against norm of 12% showing their conservative nature.
Mutthiah may be not be that trustworthy but Irani is known to be a man of high repute.
FAROUK M. IRANI, MANAGING DIRECTOR
Mr. Faoruk Irani introduced Corporate Leasing to India during September 1973, when he pionered First Leasing Company of India Limited. Mr. Irani worked towards ensuring the interest of the Leasing Industries by being instrumental in incorporating the Association Leasing and Financial Services Companies. He is the Chairman of the Association Leasing and Financial Services Companies and has shouldered this responsibilities for the last fifteen years.
Over the last thirty four years Mr. Irani functioned as the Companys CEO / President / Managing Director and groomed the First Leasing Company of India Limited from a fledgling start up Company to one of Indias Premier Leasing organisation.
Mr. Irani authored a widely acclaimed book entitled, Inside Leasing?and has been honoured by being invited to address the World Leasing Convention on six separate occasions at Washington, Sydney, San Francisco, Istanbul, Dublin and Hong Kong, Taipei, Taiwan. Mr. Irani was invited by the World Bank to address a Seminar on Rejuvenation of the Leasing Industry in Indonesia.
Recently company repaid all public deposits and changed its status such that it can’t take any more public deposits. This is to facilitate the sale as companies which take public deposit need central government approval to sell promoter stake. Conmpany is also raising NCD’s and is planning to raise more debt and make an EPS of around Rs. 25 in the current year as making 25 Rs with a book value of 160 is not that difficult to get a better price from potential buyers. Listed in both BSE and NSE and volumes are large enough that it will never get into illiquid category.
Try calling the company and collect more information to determine the likelihood of sale in the next 6 months and update the thread. I will also share what i can gather. If sale happens this is a 5 bagger. Even otherwise it could give 50% return in a year.
1). Last 38 years there has been no large drop in earnings. So assume things continue and earnings just grows by 5% on a conservative level. (Book value every year grows by close to 10% & even if we assume that ROE drops a bit from the already low 10%). So based on low PE multiple of 2 where it currently trades the stock will appreciate by 5%.
2). If you look at the valuation which the stock got in terms of book value the stock has never traded below 0.30 times book value over the last 10 years and now cum dividend the stock is trading at 0.2 times. So even if it goes back to 0.30 times which is the lowest the stock has traded in 10 years should appreciate by 50%+ further increase in value for the time it takes to reach 0.30.
3). Also in terms of PE ratio i don’t see over the long term a risk of PE dropping below 2 or earnings dropping. Infact it should increase to around 3.5-4. Historically earnings has only been growing though at a very slow pace but with low volatility.
4). Also worst case scenario i receive a dividend of 1.80 Rs per share and they have maintained this level for a very long time and this gives a next of tax return of 6%. (They have paid dividend for every year since their second year of inception. So it is fair to assume they continue to pay dividend).
5). Historically there have been spikes in stock price and even 6 months back the stock was trading in the mid 60’s and 2 years back the stock was trading at 100. If we assume that nothing works in the next 2 years i will definitely get one opportunity to sell at around 65. If i sell at 65 in 2 years i make close to 50% net IRR including dividend which is not bad.
6). The worst thing which can happen to a NBFC which can create large downside is large NPA’s and this company has historically managed their NPA’s very well at close to 0% and is very conservative and will not do anything stupid and start booking NPA losses.
Views and more information after calling company from members would be highly appreciated and would encourage me to post more such ideas.