It’s a common misconception that one should refrain from making fresh investment, especially when market is near all time highs. This may look like a logical explanation for staying away from the market, but intelligent investors do not agree with this theory, and there are logical reasons behind it.
Firstly, indices like Sensex and Nifty are composed of top 30 to 50 stocks, which does not represent the entire market, where more than 7,500 stocks are listed. Lot of good companies with strong fundamentals lie outside the radar market Indices that have huge growth potential.
Secondly, since most of these companies are small in size, they are usually overlooked by an average investors, and sometimes, even experts.
It is because of this inefficiency of the market, these companies do not get the attention they deserve, and trade below their business value despite great and consistent performance. Here, we are going to discuss three such multibagger stocks that have been performing well for the past 5 years, but are still undervalued.[/vc_column_text]
Before we reveal and analyze the stocks, it is important to mention the rationale behind selecting these companies and why we believe these companies are potential multibaggers of the future. So here are the common traits that we found in these companies.
Growth: All these companies have posted amazing growth., These companies have posted consistent growth in revenue as well as profits for the past 5 years.
Profitability: The best measure of a company’s profitability is Net Profit Margin which shows how much profit a company is able to generate against each sale. Increasing Net Profit Margin shows company is able to pocket bigger chunk of sales into profits.
All these companies have posted increasing Net Profit Margins which means the profitability of these companies is consistently increasing every year.
Institutional and Promoter Holding: All these companies have strong promoter holding(at least 50%). Secondly, these companies have seen increasing stake from Foreign investors (FIIs) as well as Domestic investors (DIIs) in the past 1 year.
Valuation: The best way to value a company is to compare the Enterprise Value of the company with the market value (Market Capitalization). Enterprise value of a company is considered as takeover value of the company.
This means if someone wants to buy the entire business, he can do so by paying the price equal to enterprise value of the company. That is why companies trading below their Enterprise Value are considered as undervalued.
Based on the above mentioned parameters, we have picked three small cap companies that in our opinion are going to be multibaggers of the future. An investor willing to invest in these companies must have a long term investment horizon of at least 2-3 years. Let us now analyze each company in detail and understand their future prospects:
WIM plast, makers of plastic products under brand name “Cello”, is a small cap company engaged in manufacturing moulded plastic products, thermoseal containers(such as flasks, hot cases etc) and writing instruments. Cello is one of the leading brand names in the moulded plastic furniture segment.
Company manufactures high quality plastic moulded furniture(such as chairs, tables, cupboards, kids furniture) and other utility products. Majority of Company’s revenue comes from manufacturing and sale moulded furniture.
Earnings: EPS or Earnings Per Share is measures how much profit a company earns against each share outstanding. Increasing EPS is a sign of increasing profitability of a company.
For the past 5 years, company has been posting good earnings growth. Company’s EPS(adjusted) has increased from Rs. 47 per share in 2013 to Rs. 81 per shares in 2017, a CAGR growth of 11.5% per annum.
Profitability: Net Profit Margin shows the percentage of sales a company is able to keep as profit. Companies with high and increasing Net Profit Margins are considered as good investment. Company’s Net Profit Margins have seen expansion in the past 5 years. While in 2013, company’s Net Profit Margin was 11.38%, which expanded to 13.57% in 2017. The reason why company is able to maintain such healthy margins is because the cost of manufacturing a plastic furniture is very low while company’s brand name allows it to charge a premium price for its products.
Riskiness: The riskiness of a company can be measured by looking at its capital structure, that is, the source of capital used by the company to fund its capital requirements. There are two ways a company can source funds. Debt and equity.
A business can be a risky investment if it has too much debt on its books, because if earnings decline, company still has to service its debt obligations. Companies with low debt to equity ratio are considered as safe investments. As a thumb rule, a debt to equity ratio of 0.5 or less is considered safe.
WIM plast is conservatively financed, and has also paid off a part of its debt. While Debt to Equity Ratio of WIM Past was 0.18 in 2013, it went down to 0.13 in 2017.
Capital Efficiency:Capital Efficiency of a company shows how efficiently a company is able to use its capital to maximize return on investments. The best way to measure capital efficiency is by measuring ROCE (Return on Capital Employed).
WIM plats has shown good and stable ROCE numbers for the past 5 years. In the year 2013, the ROCE of WIM plast was 21%, which came down to 17% in 2013.
Recent Developments:As per the Annual report of the company (2016-17), Cello has recently invested in setting up a new plant in Pardi, Gujarat for manufacturing air Coolers. Also company has invested its capital in capacity expansion of extrude sheets plant in Daman.
WIM plast stock price has seen a decline in the recent times because of weak Q1 numbers. However, the long term fundamentals of the company are still strong and company will do well in the long term.
Institutional and Promoter Holding: WIM plast has strong promoter holding with 70% of shares held by promoters. The institutional investors have also increased their stake in the company in the past 1 year.
In March 2017, the total holding of Domestic Institutional Investors(DIIs) was 3.87%, which increased to 5.29% by March 2018. Similarly, the total holding of Foreign Institutional Investors(FIIs), during the same period was 1.71% which increased to 4.22% in March 2018.
Clearly,both DIIs and FIIs find it a lucrative investment for long term.
Valuation: As mentioned earlier, one of the best ways to value a company is to compare the enterprise value with the market value(Market Capitalization).The market capitalization of WIM plast(as on 25 March 2018) is Rs.1,234 crore, while the enterprise value of the company is Rs.1,805 crores. Looking at EV to market capitalization, we can say that company is currently undervalued.
Another (and more popular) parameter of valuing a company is by comparing the P/E ratio of the company with the average industry P/E.
WIM plast is currently trading at a P/E of 27 per share, while the P/E of the industry is 40.75. Clearly, WIM plast is trading at a lower valuation compared to Industry average.
Looking at the above mentioned fundamentals of WIM plast we think WIM plast is a great stock that is currently undervalued and has a lot of growth potential in the future.
Nitin Spinners is a textile manufacturer and exporter. Company is the leading exporter of 100% cotton yarn, and is recognized by the Government. As per the latest annual report of the company, almost 60% of the company’s revenue comes from exports.
Company is now focusing on more value added products in order to expand its profit margins. Currently, value added products contribute about 15% to the total revenue of the company.
Earnings: Nitin Spinners has posted stellar earnings growth in the past 5 years. The Net Operating Revenue of the company has increased from Rs. 439 crores in 2013 to Rs. 933 crores in 2017, a CAGR growth of 16.27%. On the other hand, the growth in Net Profit of the company was even higher from Rs. 14 crores in 2013 to Rs. 57 crores in 2017, a CAGR growth of 32%.
The per share earnings growth of the company is also amazing. The EPS of Nitin Spinners in 2013 was Rs. 3.08 per share in 2013 which went up to Rs. 12.47 per share in 2017, a CAGR growth of 32% per annum. Company’s focus on value added products will not only boost its earnings, but will also increase its profit margins.
Profitability: Nitin Spinners’ profit margins have also seen huge boost in the past 5 years. While in 2013 the Net Profit Margin of Nitin Spinners was 3.16%, in 2017 the margins doubled to 6.18%. More than 60% of Company’s total revenue comes from exports, with rising Dollar Vs Rupee, Company is going to get better forex realization, which will add to the profitability of the company.
Riskiness: Textile is a capital intensive business that requires plants, machinery, etc. Being capital intensive, it is natural for companies to have debt to equity levels higher than other sectors. However, Nitin Spinners has managed to keep its debt levels in check. In the past 5 years, Nitin Spinners has maintained its debt to equity levels to 1.00, that is, 50% of the total capital is funded by debt and 50% by equity. Company’s ability to increase its earnings without incurring more debt shows that company is in a healthy state and is able to fund its expansion without using external sources of funding.
Capital Efficiency: Nitin Spinners’ Capital efficiency has seen significant improvement in the past 5 years. Company’s Return on Capital Employed has improved from 5.21% in 2013 to 8.08% in 2017. With company’s focus on cost optimization and value added products, the capital efficiency of the company is going to improve in the future as well.
Recent Developments: On January 30, 2018, the Board of Nitin Spinners decided to establish a new manufacturing facility in Chittorgarh, Rajasthan which will manufacture apparel fabric.The setup of this new factory is estimated to be around Ra. 650 Crores. Management believes, this new factory will help the company in rebranding itself as an apparel fabric manufacturer.
Institutional and Promoter Holding: The promoter holding of Nitin Spinners is strong 53%. Foreign Institutional investors(FIIs) have reduced their stake in the company, form 0.81% on March 2017, FIIS have sold all their holdings and current holding of the FIIs in the company is NIL. On the other hand DIIs have shown keen interest in the company, and have significantly increased their stake in the company.
On March 2017 DIIs had no stake in the company while in March 2018, it has increased significantly to 13.85%. Looking at the DII activity related to the stock, it seems Domestic investors are very optimistic about the future of the company’s performance.
Valuation: Nitin Spinners enterprise value is at Rs. 1,041 crores, while the market capitalization of the company is at Rs. 556 crores. Since the company’s market value is significantly lower than takeover value, it is an undervalued company.
However, if we compare the P/E of the company with the industry average, we find that the company is trading at a P/E of 10 while the industry average P/E is at 9.8. Since P/E is more popular method of valuing a company, we believe that Nitin Spinners is slightly overvalued at these levels. However, looking at the past growth record, if we assume that similar growth will continues in the future as well, it is still a good investment for long term.
Indian Hume Pipes:
Indian Hume pipes is engaged in manufacturing, construction, and maintenance of water supply projects across country. The company has a vast experience of 90 years and is a leading player in this industry. Company has presence in urban and rural water supply, hydro power projects, tunnel lining, irrigation pipelines, water treatment plants and other civil construction projects.
As the cities and rural areas are expanding there is a rising demand for water supply and sanitation. This is proving to be a great positive for the company’s business. Additionally, Government’s push to affordable housing and Swachh Bharat Campaign (Sanitation for all) has also boosted the demand for company’s products and services.
Over the last 30 years company has also been taking infrastructure development programs such as undertaking complete project of water supply from source to distribution centres such as manufacturing, laying and maintaining pipelines, building intake wells, water sumps, water treatment plants, installation of water pumping stations etc.
Earnings: Indian Hume Pipes has posted amazing growth in revenue as well as profitability in the past 5 years. The Net Operating Revenue of Indian Hume Pipes was Rs. 695 crores in 2013 which went up to Rs. 1,810 crores in 2017, a CAGR growth of 21% per annum.
The Profits of the company has also seen huge growth in the past 5 years from Rs. 22.55 crores in 2013 to Rs. 98.78 crores in 2017, a growth of 34% CAGR. Company’s earnings per share have also seen stellar growth. The EPS of Indian hume pipes was Rs. 9.43 per share in 2013 while in 2017 it was Rs. 20.39 per share, a CAGR growth of 34%.
Profitability: Indian Hume Pipe’s Net Profit Margins have almost doubled in the last 5 years. In 2013 the Net Profit Margin of Indian Hume Pipes was 3.28%, while in the year 2017. The reason behind such healthy margins is because company has started providing end to end solution. The company is not just limited to manufacturing and selling pipes, it is now providing end to end solution by taking up the entire project under its operation, which helps company in achieving cost optimization and achieve better profit margins.
Riskiness: Indian hume pipes has some debt on its books. Although it has pared down a part of its debt in the past 5 years, the debt to equity ratio of Indian Hume pipes in 2013 was 0.74 in 2013, while in the year 2017 it went down to 0.65. Although the debt is still on the higher side, it should not be a matter of concern as company is earning a healthy return on its invested capital and its earning is growing rapidly every year. Higher earnings shows that company is able to utilize funds borrowed by debt in an efficient manner.
Capital Efficiency: Capital Efficiency of Indian Hume pipes has improved significantly in the last 5 years. In the year 2013 the Return on Capital Employed(ROCE) of Indian Hume Pipes was 3.03% which more than doubled and went up to 7.43% in 2017. In the future, company expects to improve its capital efficiency further.
Recent Development: On April 23, 2018, Indian Hume Pipes received an order worth Rs. 578 crores from Madhya Pradesh Jal Nigam. The order book is almost equal to 25% of the Net operating Revenue of the company.
Institutional and promoter holding: Indian Hume Pipes has strong promoter holding of around 70% in the company. The FIIs have increased their holding in the company in the past one year. In March 2017 FIIs had no holding in the company, while in March 2018, FIIs had 0.44% stake in the company. Domestic investors (DIIs) on the other hand have holding above 5% of the total stake in the company. However, in the past one year, DIIs have slightly reduced their holding in the company from 5.56% in March 2017 to 5.28% in March 2018.
Company has an Enterprise value of Rs. 2,134 crores, and the market capitalization is around Rs. 1,661 crores. Indian Hume pipes is generating has been showing positive and increasing operating cash flow for the past 5 years. In 2013 the Net Cash Flow from operations for Indian Hume pipes was Rs. 4 crores while in 2017 it went upto Rs.146 crores. Despite being cash rich company, company is trading at a P/E of 21.83 while the Industry average P/E is at 33.74. Clearly, despite being strong performer, company has remained undervalued because of market inefficiency.
While all the three stocks have strong fundamentals and are trading below their takeover value, from an investor’s point of view, it is the future growth potential in the company that one should really focus on.
Based on the product portfolio and their marketability, I am really optimistic towards WIM plast and Indian Hume pipes. With rising demand for infrastructure, both for residential and commercial purpose, there will be increasing demand for durable and economical furniture. WIM plast has strong brand recognition and ability to provide quality products at a reasonable price. Company’s diverse range of products such as food grade stainless steel lunch boxes, thermostat flasks, bottles etc help the company de risk its dependence on a single product.
Indian Hume pipes is also a great bet for long term.
Company has lot of projects in its orderbook, and most of them are very simple in their execution. These projects have low gestation period because of which company does not face cash flow problems.
KARNAM PRABHAKAR RAO says
All are good stocks which are undervalued,which are multibaggers,thank you infimoney for this valuable information.
Ankit Shrivastav says
Thank You Prabhakar
Thank you for the analysis and information on these undervalued shares. Planning to invest in Indian Humes Pipes at current prices.
PARMAR GV says
very good analysis with all the details and clear view without any confusing remarks. Otherwise on most of site the remarks are so confusing that we are not able to take any decision. Thanks again for fine work and god bless you all.
Does Indian hume pipe and win plast at current price look attractive after we saw some good hammering in last couple of months?
Munish Sharma says
Ankit, this is one of the best blogs I’ve ever come across. Specially being totally new to investing, with half of the things going way over my head, your blog has helped me getting the fundamentals right. Although it still gets complicated because all I do is see numbers without realising the context behind them. But I’m willing and hopefully will get better. Do u take classes or have a course or something where beginners like me can come and learn?? Thanks.
Hello sir, thanks for ur detailed analysis about nitin spinners. What are your current thoughts about the company given the covid situation and a high debt.
I am holding since 90 levels and able to hold for 5-10 yrs. What can be the target for this company in 10 yrs.