SmallCap Hunter : Trying to find the dark horses with triggers

Q&A: Questions & Answers Portfolio Q&A
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Hello,

I have been an avid follower of ValuePickr forum and it has helped me shape my investing decisions. I have a 6 months - 2 years view on all these stocks, which can be further increased based upon performance.

I have basic finance background, have done a fundamental analysis course from BSE(which was actually helpful with loads of practical knowledge). Have bookmarked the investing books from valuepickr article on investing books and will be starting them soon. Also pursuing CFA Level 1. I am currently working with an experienced investor who has taken me under his wing to mentor and I am trying to learn and grasp as much as possible from him and would love to be mentored by fellow experienced investors. Have been an active investor only for the past 7 months.

Now, coming to the stocks, my main lookout is for triggers such as expansion(especially massive capex already done in last FY or getting done in next 1-2 quarters), import substitutes, demand-supply mismatch(such as current container shortage). I am looking for growth in bottomline and topline within 1 year. Also, I like stocks with low free float, which gives scope for colossal returns, when management has skin and competence. Also, I like to check P/E(alongwith industry P/E), P/B, OPM, ROCE, ROE, D/E, Earnings yield and few other metrics before deciding to dig deeper into ARs.

Coming to my picks(Heavy allocation) :

1) Pokarna - Massive Quartz expansion taking place in December 2020. Best in quality(based on scuttlebutt) and No 1 in terms of value as well. Home interiors will get a boost even after covid and with high ADD on Chinese products + reduced ADD on Pokarna are a plus. Waiting for a small correction to enter big. Preferably @140 levels. Expecting a 2x return in 2 years.

2) Lancer Container - Shortage of containers in India. Lancer having very low free float was a juicy call @60 considering there was no great upmove or downmove for a long time. With vaccines coming into play + Make in India leading to improved exports and decent metrics, decided to take the plunge. I feel container demand will be on the higher side over at least next 2 quarters if not more.

3) Alufluoride - Needed for aluminium smelting. Massive capex done and moved into new factory in December. Entered with half of desired allocation as Q3 nos will be pathetic(old factory was shut in order to transition to the new factory). Entered @175

4) MMP Industries -

FUTURE PLANS / PROSPECTS:-

"(A) ATOMISED AND PYRO & FLAKE POWDERS
After the start of operations in end of April 2020. Unit I (Bhandara) reached full capacity utilization during the month of May 2020 and is expected to operate at full capacity for the rest of the year.
Commercial operations of the Umred powder plant facility began in October’2019. Due to prevailing COVID-19 situation Unit II (Umred) was temporarily shut down in March 2020.
Looking at the present market condition and positive signs of demand pickup, Company estimates that the Unit II may restart its operation by the beginning of August, 2020 (subject to COV1D issue not further deteriorating). We expect that this capacity will also be fully utilized by Q-4 of FY 2020-21.

(B) ALUMINIUM FOILS
The Aluminium Foil project is at an advance stage of implementation inspite of the difficulties of the current adverse situation. Your Company expects to begin production of both bare foil and converted foil during Q-4 FY 2020-21 or earlier. In view of many audits and approvals before bulk supplies can begin, your Company will utilize a small % of capacity during FY 2020-21 and 50-60% during FY 2021-22. This can be scaled-up faster, subject to pharma customers speeding up approvals keeping in view the very buoyant market conditions prevailing today (Chinese and ASEAN region imports are reducing).

© ALUMINIUM CONDUCTORS

As reported last year, Aerial Bunched Cables (ABC) project is nearing completion. The Company envisages a moderate continuing growth in the aluminium conductor and cable sector. Trial production is expected to commence during August-September 2020. This will enable improved capacity utilisation, enhance value addition and diversify the product portfolio."

Self explanatory excerpt from AR which was the investment rationale + the fact of having it below it’s Feb 2020 prices and not overvalued even at current prices.

Entered @90

5) Kanchi Karpooram - Capex completing in December 2020 which will increase capacity substantially leading to improved topline and bottomline over a 1-2 year period. Camphor is currently in demand and I expect it to remain so in the medium term. Entered @425

6) Kitex Garments - No 1 from India for kidswear export. Decent capex done and ongoing. New textile policy is one of the triggers for the same, along with opening of economy. Entered @122

7) Vardhman Acrylics - New textile policy play which will likely favour Man Made Fibre oriented companies. Vardhman seems to be decently valued in it’s pack and again with low free float presents an opportunity for massive jumps in prices. Entered @34

8) Apex Frozen Foods - Huge Capex completed in FY20, wherein they moved to a new facility from their leased facility, They have also entered the ready to eat market which is expected to grow hereon. Again waiting to enter more below 300 for a 2 year period. Entered @270

Most of these stocks have low P/E and seem fairly valued. Considering how the market has run up, it is becoming tough to find quality companies at decent valuations.

Currently tracking(Zero/Tracking positions in some) :

  1. Sirca Paints
  2. Varroc
  3. Vikram Thermo
  4. Transpek
  5. Electrosteel Casting
  6. Safari Ind
  7. Shivalik Rasayan
  8. Ice Make Refrigeration
  9. Mangalam Organics
  10. HBL Power
  11. Greaves Cotton
  12. HFCL
  13. OCCL
  14. Rajratan Global
  15. Phillips Carbon
  16. Shree Pushkar
  17. Maithan Alloys
  18. Genus Power
  19. Amines & Plasticizers
  20. Hikal
  21. Mayur Uniquoters
  22. Gujarat Fluorochemicals
  23. Sarla Performance
  24. Borosil

Low confidence due to lack to data(or management quality) but mouth watering valuations/triggers

  1. Chemfab Alkalis
  2. Rama Phosphates
  3. TGV Sraac
  4. Sandur Manganese
  5. BCL Industries

I will provide rationale for each stock in coming days. I have given a basic viewpoint as to what I look for while investing. Many companies have detailed explanations on ValuePickr itself, but would be more than happy to provide more information, wherever possible. Looking forward to constructive feedback and/or more info on the companies mentioned above from esteemed members of this amazing portal.

Disclaimer : Not a SEBI Registered Investment Advisor. These are not buy or sell recommendations.

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Good One Aniket, fellow VPians were doing scuttlebutt on Sandoor, here is the presentation that might be useful for you. Sandur presentation VP group Oct 2020.pdf (2.8 MB)

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I regularly track TGV Sraac and attend AGM too , management is trustworthy .

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There is a news earlier today (unable to find the link), anti dumping duty on caustic soda is extended by another three months (earlier one was until Nov. 20). TGV - ( https://en.wikipedia.org/wiki/T._G._Venkatesh ) is a sitting Rajasabha MP and very shrude businessman. He started his career with Congress and then TDP now in BJP. I am from the same state but I prefer to stay away from companies that have direct political affiliation.

Just this news broke out, Rayapati Sambasiva Rao ( TGV and all these guys are buddies ) , it’s just a chargeheet , just imagine the impact of companies that has these kind of affiliations.

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Do lookup

  1. Vipul Organics, expanded 6x. The new plant is live. Last quarter results were good and this quarter likely to be good as well. Depreciation for last 2 quarters is high as plant is live. Company has maintained working capital on higher revenue
  2. Medicamen biotech, sister company of shivalik

How do you find out about expansions ? Do you search filings?

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Being friends doesn’t mean TGV is also involved.

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@edwardlobo Have been keeping a track of both :). Technically aware of most expansions playing out atm. Vipul has purchased a subsidiary, thus increase in Gross Block(new plant in Gujarat is yet to start construction work). Their talegaon plant was also shut for a long time. Thus stock languishing below 100. Certainly need to track how they progress. Honestly, in dyes industry, shree pushkar is my fav pick due to good mgmt and diversification in fertilizers as well as decent amt of capex being done by next FY(postponed from Q4 FY21).

Tracking medicamen, along with shilpa medicare, gufic biosciences etc. The list is too long to be put here. Also, pharma has run up too high for my liking, would wait for covid to die before analysing true value in that pack again. :slight_smile:

About expansions through screener. Have purchased premium to have no restrictions on no of stocks as well as columns(ratios). Get regular updates there. And then keep following concalls, investor ppts etc wherever possible to get latest updates on the progress and accordingly position your entry 1Q before expansion is to be completed and then sit for a year or two to hopefully get 50%+ returns. More than likely there is some sort of delay, so needs constant tracking of progress. I have an excel where I have kept trigger dates for all my watchlist stocks (over 50-60), which helps me decide which stock to pursue in which qtr. Many small cap expansion plays(from FY 20 with good mgmt) have given even 3x and above returns since March. On an avg I expect 50% return in 1-2 years.

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Certainly not to be considered against TGV, but honestly, trust factor reduces when someone is involved in politics. But accordingly price is also depicting that and valuations are reasonable for TGV Sraac. For me, if I enter TGV it would only be for a year or max 2, just to play out the capex cycle. I like their upcoming chloro methane project which can primarily be used for pharma, would take a ride on it when it is playing out. Also, in last FY they upgraded their factory to improve performance, which can start showing results from this year onwards.

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U read my posting in value pickr for TGV , u will get plenty of ideas. Their chloromethene is already on stream and they are doubling their capacity.

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Expansion is supposed to be completed by Q4 FY 21 as per my understanding. Would be glad to know the updated timeline from you.

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I checked most of these companies just now and they all are trading around or less than the price of entry.
With small caps you cannot make money just by following companies that announce expansion plans. A simple way to identify great small caps that have potential to become large caps is by looking at their cash flows. If a small business can generate more cash than it needs in a year + invest that cash at good returns in its own business, that’s the magic formula.

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That’s golden advice. Will certainly keep that in mind. Self-Sustainable Growth Rate (SSGR) should be an important metric as seen in Dr. Vijay Malik’s blogs as well.

I have a small large cap portfolio with companies such as Biocon, Hero Motocorp, ITC and the likes which were purchased in the last 2 years which will now form about 20% of my entire portfolio for a perpetual kind of investment whereas 80% would be dedicated to small caps and mid caps. Even in these there would be sub divisions between 1-2Q plays based on immediate triggers(such as Lancer Containers) and long term buys which can become multibaggers(such as Shree Pushkar). It’s just been 6 months since I have been actively searching for small caps, so I would like to complete the small cap universe before moving on to the mid caps. I am on a mission to know about most companies traded on BSE and NSE which I believe is a long term process over the next 3-4 years.

Btw, have entered into most of these heavy allocation stocks over the last two weeks. So I am expecting a choppy ride and thus many prices are below my purchase price. I intend to add more if some of these stocks fall by 10-20% in the coming months(Shree Pushkar, Apex and similar quality stocks). My tracking list, in which I have stocks like Guj Fluorochem, Ice Make, Amines & Plasticizers, Shree Pushkar has given a decent return of over 30% in the last 2-3 months. But I do would be glad when this is sustainable over a much longer period and not just a one off over optimistic rally.

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How you consider news from rating agencies like “Issuer did not cooperate”.

This is for Kanchi Karpooram and vipul O.
https://www.indiaratings.co.in/PressRelease?pressReleaseID=40386&title=india-ratings-maintains-kanchi-karpooram-in-non-cooperating-category

Thanks.

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Hello.

I find the strategy attractive.

You can also look at Asahi Songwon (Recently completed Capex for JV), Akshar Chem (Doing Capex for Silica project) and Bhageria Industries (Backward capex completed in Feb/ forward capex pending)

Asahi did buyback recently even after doing capex.

Regards

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Depends upon the company. For Vipul Organics, it’s just in my watchlist. I am waiting to see some more data before thinking of putting money in it. Maybe even a visit to the factory to see the status and operations.

For Kanchi Karpooram, they have zero net debt. So I do not see it as negative for Kanchi Karpooram with regards to credit rating news. But yes, I am not 100% convinced with the management and governance there. But time will tell whether it becomes a 2-3Q play or a 2-3 years or more play.

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Thank you for your detailed response. I did listen to pushkar concall and their dye capacity is fully utilised so the revenue from dyes don’t have a scope for increase

On vipul organics, the management told me one of the major shareholder is exiting due to personal monetary issue. He had around 3% stock which is now nearly all absorbed. From what I know in their 2019 & 2020 annual report there are no closed plants.

As per their bse filing the new plant has started production. Another company in dyes is Bhageria, even their plant is fully utilised and they are going for expansion of dyes. Currently the industry capacity is lower than demand abs given that the new dyes zero discharge plant of vipul organics is just open 2 quarters back it might do well from here. Just my humble opinion

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Deven

Ratings are required by a company only when they need debt. The rating agencies charge a fee. I think if the company does not wish to raise debt, the advisable course of action is to save that unnecessary cost.

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Thanks
So on screener you keep column for difference in gross block and capital work in progress?

Concall might be taking a lot of your time.

We would love to get a copy of your spreadsheet if you can I would be very appreciative

I do read all bse updates and try to get expansion news from there

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I don’t mean to discourage you at all but your strategy is one of wealth erosion and not wealth creation. By allocating 80% of your portfolio to micro cap names (some of the ones mentioned are smaller than most small caps) you are gambling on the chance one of these become a 100 bagger for you rather than optimizing to grow your portfolio by 20-30% every year.

If you alter your strategy a bit and invest 80% in mid caps rather than small caps (with proper research and due diligence) you will find your wealth increasing a better pace than the current strategy.

Again, nothing against you or your strategy, just sharing my 2 cents and trying to protect you from a mistake most people entering the markets first time tend to make.

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Without being as harsh as that, I do concur with the general sentiment of the post. IMO most microcaps will destroy wealth. This is because they are not differentiated and hence there is really no reason for them to continue to grow well into the future. IMO Alufuorine, lancer and Kanchi karpooram fall in that category.
At the same time, I would not say that microcaps as a universe is uninvestable. But the threshold/bar for investment (both valuation comfort and qualty of business) has to much higher, IMO. I am Invested in some microcaps like Chemcrux, RACL Geartech, Axtel industries (Full non-up-to-date PF here).

I personally monitor some screeners looking for both consistent growth microcaps (https://www.screener.in/screens/290863/1-Nov-SmallCap-healthy-growth/) and turn-around microcaps (https://www.screener.in/screens/245381/Sahils-smallcap-ST-or-MT-turnaround-stories/) but IMO most are not investment worthy/grade.

Among all your PF and tracking positions, the ones I like the most are Mayur, Safari & to some extent Pokarna.

All the best and I wish you lot of investment success. :slight_smile:

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