Reading the Motilal Oswal Wealth Creation report, prepared by Raamdeo Agrawal and his team of ace stock pickers, and tracking the performance of the stocks listed in it as potential 100-baggers, is pleasurable activity.
The report lists seven small-cap stocks as potential 100-baggers. The parameters used to select the stocks is summarized in the acronym “SQGLP” i.e. Size, Quality, Growth, Longevity and Price.
So far, the seven stocks have put up a spirited performance as you can see from the chart below:
|Stock||Price on 10.11.2014||Price on 27.07.2015||Return (%)|
*Adjusted for bonus, @Adjusted for split
Now, Motilal Oswal has issued an Initiating Coverage report on Aarti Drugs and has recommended a buy on the basis that:
“Given the robust revenue visibility that the company enjoys from its dependence on the domestic and global pharmaceutical industry, aggressive expansion plans in high value segments, a 23% CAGR in profits over FY15-17E along with consistently expanding return ratios and dividend payout of 30%; we believe company is available at attractive valuations at 14.3x FY17E.
We value the business at 18.0x FY17E EPS which is a 20% discount to the mean multiple of 22.6x commanded by midcap formulation companies and recommend a BUY rating on the stock with a target price of INR 850/share.”
It is worth noting that Aarti Drugs belongs to the reputed Aarti group which also controls Aarti Industries. The group has a long track-record of creating wealth for shareholders in a slow and steady manner.
The company is a small cap with a market capitalisation of about Rs. 1600 crore. It enjoys high EBITDA margins of 15% and high ROE of 25%. The EPS growth in FY 15 has been 24%. While the P/E of 21x is high for a micro-cap, this has to be seen in the context of the pace of growth shown by the company.
Motilal Oswal’s target price of Rs. 850 means that we are talking about a 25% upside from the CMP of Rs. 682. This will be the first milestone in the long journey to becoming a 100-bagger!