Ganeshram Jayaraman, MD of Spark Capital, has recommended several mid-cap and micro-cap stocks for investment.
The list has been worked out keeping in view the potential of these companies to compound earnings through value-creation over 3-4 years even if they look expensive on a 12-month horizon.
The stocks have been picked from sectors like financials, consumption, discretionary consumption like automobiles. It includes companies from the infra space which will benefit when government spend increases. The portfolio is positioned towards a domestic demand recovery centric midcap portfolio.
|YoY Return (%)
|City Union Bank
|Karur Vysya Bank
The thought process behind that 2020 note is to buy two sets of stocks. One is, stocks which have been performing very well, demonstrated track record, where the managements have created some kind of edge, some advantage they have, which we believe will sustain till then. So, it makes these businesses more predictable, more consistent and those make it buy and hold view with the way we see things taking shape in terms of the demand recovery.
So, it is not meant to be seen with a value mindset, it is more like more earnings compounding story with a 3-5 year horizon where we see true potential of those businesses take shape. Lots of changes on demographics, lots of changes on how we see demand pattern take shape as we see in that phase. So, it is not necessarily stocks which are looking good with a 1 year price to earnings multiple but more structural businesses and the likes. So, some of these stocks will look costly on a 12 months horizon but we are taking a 3-4 year view on these.
Indian Terrain – it has tremendous value because it is quoting at 1x sales:
It is an apparel brand company Chennai based. It is demerged from the erstwhile Celebrity Fashions. It is kind of a niche brand and gaining popularity and that is a company that we see tremendous value actually in for a brand which has close to Rs 400 crore of sales trading at almost Rs 400 crore market cap. So, it is a micro-cap, it is not going to fit the criteria of many funds but that is a stock where we think there is good potential.
Blue Star – market share has doubled but stock price has remained static:
Blue Star has had a pretty strong transformation in the story. We saw how this company was five – six years back as more of a project engineering company and more cyclical and a lot of the margins and EBITDA came from that business. Today a transformation has happened in the form of a B2B becoming a B2C story and more AC lead where we are seeing the opportunity remaining more structural, its market share is doubled and whereas the stock price has gone nowhere in this five year – six year horizon. So, this transformation has happened in the business which we actually think from the cash flow standpoint from a structural more steady state, more working capital improvement in which has happened we don’t think the street is fully reckoning that business upside. Over a period of time we think this will pay off as we see.
Federal Bank & Karur Vysya Bank – trading at compelling valuations of 1x book value:
There are 3-4 things which are improving. One is government spend, a lot of the NPA challenges which these banks faced were also result of over the last 2-3 years delayed cash flows and the whole debtor paying creditors cycle getting elongated which we see improving with government spend picking up, with more activity levels, with more consumption picking up, those will start reflecting. Also we see rural having bottomed out and kind of improving. So, over the next 12-18 months we will see cyclically challenged NPA cycle beginning to improve. We need to draw distinction between structurally challenged NPAs which where we know are larger names there but more cyclical nature is where the exposure for these banks are more in. We see that improvement still not there, we see it coming and that makes these stocks very good value actually. Some of them trade just about at book value or marginal premium to book value which makes them actually compelling.