SmallCap Hunter : Trying to find the dark horses with triggers

Q&A: Questions & Answers Portfolio Q&A
825

I went through the company, but I don’t have full conviction yet. Here are some key points:

Positives:

  • Management is projecting 8-10x profit growth over the next 3 years.
  • EWA loans have grown from ₹2 crore to ₹3.5 crore QoQ, according to management.
  • They charge only processing fees with no interest on loans.
  • Almost zero NPAs in the EWA category.

Negatives:

  • Larger companies already have internal infrastructure for EWA, limiting market potential.
  • Management struggled to recall key figures for the EWA and business loan divisions and didn’t provide a breakdown in their presentation.
  • The EWA market in the USA is only $22 billion, which might indicate the market isn’t that large.
  • Management claims NBFCs and banks aren’t interested in ₹25,000 ticket size loans, which I don’t believe is entirely accurate.

It’s an interesting new product, but there are some unclear aspects, which is typical with microcaps. I’ve taken a small position for now.

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826

Hi, anyone here tracking oswal agro mills? The recent announcement dated 16th September 2024, stating that the company has received 23 lakh sq. ft. area in the form of DRC. Based on a rudimentary calculation based on reputed articles, the company can sell these to other developers at Rs5000-6000 per sqft, thus a windfall gain of around 1000-1200 crores on a market cap of approx 1000 crores, this seems like a no-brainer. Does anyone have any thoughts about the same?

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827

I had interacted with Emerald to roll-out EWA in our startup. The following were my observations:

  1. They don’t have any senior guy leading the sales of EWA - promoter’s son is taking care of that. He is still studying his MBA or any other PG course, i don’t remember exactly.
  2. The product is okay - lot of other NBFCs are also adding this product in their arsenal. It can be another product for a NBFC but making it your sole revenue generator is a stretch.
  3. Adoption is challenging for those companies with relatively higher field related work. Companies prefer to have salary as a medium to recover on-field losses or cover absconding cases, etc.,
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828

Where to check the activity of MF houses whether they are buying , selling smallcaps or sitting on cash?

829

DIY approach is to check the disclosure from each fund house. I do track it for few of the select fund houses (PPFAS flexi, Quant Focus, and Tata Balanced). You may check their websites to download the fact sheet and export to excel to do the analysis.

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831
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835

Great pick but One thing, 0.05% that is not conviction also if it goes 10X it still means u just made 0.5% increase in the overall gain that for you would not mean much as 0.5% is what stock move in a day.

Wealth can be create with a bit of concentration or even Mutual funds are good

836

Indag Rubber…Refer annual report
Entered into BESS through JV and manufacturing BESS for subsidiary of Hitachi Energy…

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837

Here’s my analogy: When I explore micro-cap stocks or those with a market capitalization below ₹500 crores, my focus is on building strong conviction before gradually increasing my stake, but I can limit it to a maximum of 1%.

Additionally, risk appetite tends to evolve over time, especially when the portfolio, built on stable and undervalued quality stocks, performs well.

Lastly, allocations like 0.05% or 0.5% have different implications based on the size of the portfolio, which varies from person to person.

Also, when you are good in something (mentioning in a good way) why to go to Mutual Funds, I’m currently 99.9% invested in equities. MF is only for taxation purpose though very limited.

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838

Can you please give a brief thesis for investing in Polylink Polymers.What are the triggers and what are the growth areas that you see. Ebitda margin seems to be on the lower side (4-5%). CFO is also negative and Trade receivables are high. This quarter the promoter holding has reduced. It seems like few minority promoter group shareholders are trying to exit. If you can guide on the company prospects a little bit then that would help. Thanks in advance!

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839

To be honest, I don’t come from a financial background and don’t analyze an extensive list of parameters. My approach to value trading is relatively simple and focuses on certain broad observations:

1st Approach:

I generally look for companies where the stock has seen a significant correction (e.g., a steep decline from its highs) and where there’s been notable improvement in fundamentals over time. These situations often create potential for strong upside.

2nd Approach:

Another scenario I focus on is when a stock has been consolidating around earlier levels, but the underlying financial performance (e.g., profits or revenues) has improved significantly compared to the past.

Of course, I also consider other factors like Debt-to-Equity (D/E) ratio, Return on Capital Employed (ROCE), etc. It’s not about checking every quarterly result but taking a long-term view if the fundamentals align.

For further context, you can check out relevant threads or discussions that explore such ideas:

• MapmyIndia Discussion

• Lancer Containers Thread

Note : This post is purely for learning purposes and should not be considered financial advice.

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840

What’s your view on KONSTELEC. It’s 120 cr micro cap company. Healthy order book of around 600 cr. They basically doing a EPC business focus on electrical infrastructure.
Strength 1 Good order book with quality clientele. PSUs as well as private sector.

Risk 1 This company is not able to generate free cash flow ( typical EPC business problem)

Recently added this company. Trading at 19 pe. Below industry or. I don’t find any reason for such low valuation. Please look into this company. I don’t have financial background so I have limited understanding of financials.

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842

Can someone please enlighten me about the details of the capex done by kingfa science in FY24. They have done a huge capex but there is no significant change in topline. Was it just a maintenance capex?

843

Are you tracking Shish Industries?

844

I’m not a SEBI-registered advisor, so I cannot provide direct investment advice. Also, I’m not actively tracking this company.

That said, here are my personal views (not a buy or sell recommendation):

The company appears good based on its financials, and if held patiently, it may potentially reach the ₹20–₹25 range. However, since this is a micro-cap company, it’s crucial to closely monitor its capex plans and sales growth for a long-term perspective.

Its debt-to-equity ratio looks healthy at the moment, but it’s important to ensure it doesn’t rise significantly. Additionally, understanding the corporate governance practices of the company is essential before making any investment decisions.

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846

Also any view on Energy development corp as I see it turning into profit in coming quarters and still promoters are holding and accumulation is on

847

Just entered Krystal integrated services - seems like a speedy growth company in FMS .

848

Thank you Lovish ji for you reponse. I would really appreciate your input on the growing negative cashflows in Shish Industries. How would interpret that?

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851

Kindly Ignore the deletions done by mistake earlier.

Cash Flow Observations:

  1. Cash from Operating Activities (CFO):

• Significant improvement in CFO from March 2021 (₹2.25 Cr) to March 2024 (₹12.55 Cr).

• A notable increase in profit from operations, from ₹3.12 Cr in 2021 to ₹13.56 Cr in 2024.

• Working capital changes have negatively impacted CFO, especially in 2024 (-₹22.96 Cr), which suggests the company might be tying up more funds in receivables or inventory.

  1. Cash from Investing Activities (CFI):

• Investing activities show consistent cash outflows, with March 2024 recording a significant outflow of ₹18.13 Cr. This is primarily due to fixed asset purchases (₹11.58 Cr in 2024).

• This indicates the company is actively investing in expansion or upgrades, which could be a positive sign for future growth.

  1. Cash from Financing Activities (CFF):

• Inflows from financing activities were strong in March 2024 (₹19.87 Cr), mainly driven by proceeds from borrowings (₹17.04 Cr). This suggests the company is leveraging debt for expansion or operational needs.

• Debt repayment is also evident, indicating the company is managing its obligations.

  1. Net Cash Flow:

• Net cash flow turned positive in March 2024 (₹10.81 Cr) after being negative in previous years, indicating an overall improvement in liquidity.

___________________________________________________________

Key Insights and Considerations:

• Positive Cash Flow Trend: The improvement in operating cash flow and net cash flow reflects better financial management and operational efficiency.

• High Borrowings: The rise in borrowings highlights a reliance on debt, which must be monitored to ensure it doesn’t overburden the company.

• Capex Focus: Substantial investments in fixed assets indicate a focus on growth and capacity expansion, but it’s crucial to ensure these investments translate into revenue growth.

• Corporate Governance: Since this is a micro-cap company, evaluating the transparency and governance practices is essential.

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852

EWA currently contributes about 2% of Emerald’s revenue currently. I did some back of the envelope caculation based on their guidance and the numbers seem almost insignificant as far as EWA is concerned. Not sure how they are guiding for 8 to 10x PAT growth in 3 years.

FY26

Run rate at the end of FY25e = 2 crore monthly.

Run rate at the end of FY26e = 15 crores monthly.

Considering 1 crore run-rate increase every month on an avg., total disbursement from EWA = 2 + 3 + … + 13 = 90 cr.

Total revenue = 1.5 % of 90 cr = 1.35 cr.

FY27

Run rate at the end of FY26e = 15 crores monthly.

Considering it to be constant 15 crore every month, total disbursement = 180 crore.

Total revenue = 1.5 % of 180 cr = 2.7 cr.

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