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On The Radar: India's Small-Cap Equities (Concluded)

We have been running a series of articles titled ‘Under The Radar: India’s Small-Cap Equities’ beginning in December 2011 - and followed up twice - with the last article in December 2013. We would like to conclude this series after updating the small-cap index level and returns, comparing it to our expectations ex-ante, and analysing the current scenario.  Following this, we have also outlined where we may take this blog in the future. The small-cap index closed at 11,087.07 on December 31 st , 2014.  This compares to a level of 6,150.65 in our last article – resulting in an advance of over 80% to date. This is a handsome absolute return by any standard, particularly compared to Indian government bonds, which yielded around 8-9% for the period.  This justifies the conclusion at the end of our previous article that “small-caps in India offer among the most attractive bargains during any time since 2006 and certainly in the entire Indian stock market today”. Of cour
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Under The Radar: India’s Small-Cap Equities (Part Three)

In February of this year, we summarised the valuation parameters of the BSE Small-cap Index in India (now the S&P BSE Small Cap Index) - following on from an earlier report we wrote in December, 2011 - and drew certain conclusions. We would like to update the valuation scenario with the data today, review those conclusions, and form new ones based on the available information. The small-cap index closed today (17 th December, 2013) at 6,150.65 with an indicated price to book value of 1.04. The closing value as on February, 2013 was 7,006.73 representing a decline of over 12% as of today. The current index value masks a greater fall of over 27% to a low of 5,085.56 in August, 2013. This represents an unsatisfactory overall performance for those who invested in small caps at the beginning of the year. In our earlier report, we made two assumptions towards the end of our report to form a conclusion as to prices then:              1)   “The market has a
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Under the Radar: India's Small-Cap Equities (Part Two)

About a year ago, we analysed the valuation of India's small and mid-cap indices to determine whether they were attractive for purchase by investors (see post below). Our analysis revealed that the indices appeared undervalued by historical standards. We decided to have another look at the current valuations of the indices to recap performance and determine the price attractiveness today. When we wrote our post last year, the small-cap index closed out at the level of 5,550.14. The closing level today is 7,006.73 – resulting in a gain of over 26% in a little over a year. So, how does this level stack up against the basic fundamental metrics of the underlying businesses?  Here’s a summary of the valuations sourced from the BSE website: Table 1: Annual valuations (2006 to 2012) Year High Low Close Price/ Book value 2006     7,872.80    4,480.45     6,892.32            2.05 2
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Chemfab Alkalies

Chemfab Alkalies operates in the heavy chemicals industry and is in the business of manufacturing Chlor Alkali products. It primarily manufactures Caustic Soda Lye, comprising about 75% of revenues, which is used in various basic industries such as paper, aluminium, textiles, etc.  It also produces chlorine (comprising 12%-13% of revenues), hydrogen, sodium hypo chlorate, and hydro chloric acid – also finding applications in various manufacturing industries. The company reported reasonably stable (albeit somewhat declining) operating profits and revenues in the last five years – reporting about 16cr in operating profits on revenues of 77cr in the last financial year.  It held cash and liquid assets of over 27cr as at 31 st March, 2012 The business is very cyclical – dependent not only on international demand fluctuations (primarily from aluminium manufacturers) arising from global economic cycles but also global oversupply in its own industry arising from capacity addit
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IFB Agro Industries

IFB Agro Industries is in the business of producing alcohol (70% to 75% of revenues) and marine products. The company is based out of the state of West Bengal (WB), which is well known for its regressive attitudes towards businesses.  In the alcohol segment, it distributes ‘Volga’ vodka, ‘Jubilation’ rum, ‘Benjamin’ brandy (latter two launched recently).  Demand in the Indian Made Foreign Liquor (IMFL) appears to have a promising outlook with growth estimated at about 20% per annum.  It has also installed a new plant to enhance its country liquor production capacity since demand was outstripping supply – however, licenses weren’t granted by the state as at the end of last year.  In the marine segment, it distributes frozen marine products in the major metros through retail chains under the “IFB Royal” brand.  It also has a 48% market share in the shrimp feed trading business.  It had recently enhanced capacities in the marine division including new IQF machines and cold
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Bharat Fertilisers

Bharat Fertilisers is engaged in the fertiliser business and construction activities. Fertiliser is considered a core sector industry in India and management assert that the company has the expertise, knowledge, and infrastructure available to operate in this industry.  Due to the troubles facing the industry (see below), management are buying up ‘sick’ Single Super Phosphate (SSP) units in the states of Gujarat, Madhya Pradesh, Karnataka, and Andhra Pradesh. Its construction and real estate activities are concentrated in Thane, Maharashtra.  It expects to let out commercial space within the next two to three years and generate about 5cr in lease fees per annum (before costs). The company reported erratic/marginal operating profits prior to the year ended 31 st March, 2009 but has shown growth in revenues and operating profits since then except for a minor downturn in the last financial year when it reported over 12cr in operating profits on revenues of about 30cr.  It
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Dhanalaxmi Roto Spinners

Dhanalaxmi Roto Spinners is in the business of trading textiles, paper, and wood pulp. It is established in the paper and wood pulp markets and management intends to set up a manufacturing facility for forestry and logging products.  Management also intends to enter commodity trading and exports. The company has reported growing operating profits on a growing revenue base in the last five years – reporting about 1.3cr in operating profits on a revenue base of about 30cr in the last financial year.  It operated with a net cash position of 3cr. The company is currently exclusively engaged in the trading business and hence, does not own valuable long-term assets that can generate consistent earnings.  The wood pulp market is dependent on the international demand/supply situation and hence, slowing demand and oversupply has a detrimental impact on the company’s profitability.  The company is dependent on suppliers for product and has virtually no pricing power with c
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