Aavas Financiers is added to the Little Champs portfolio
Aavas Financiers is very familiar to us because it was recommended to us as far back as in April 2019 by Gautam Trivedi of Nepean Capital.
He had described it as the “next Gruh Finance” with impeccable logic:
“We believe that the Jaipur-based eight-year-old entity is the next Gruh Finance in the making, a stock that has not only created considerable shareholder value, having not only risen 70x over the past 10 years, but has also become the poster boy of semi-urban housing finance,” he said.
He also pointed out that Aavas Financiers is following the business model adopted by HDFC Ltd to ensure that its NPAs are as minimal as possible.
Saurabh Mukherjea has also provided crisp commentary about the merits of Aavas Financiers.
“We have added Aavas Financiers to our portfolio. Aavas Financiers is an affordable housing finance company which was incorporated as a subsidiary of AU Small Finance Bank in 2011. Currently, it is backed by two private equity players – Kedaara Capital and Partners Group and is led by Sushil Agarwal who was a part of AU’s leadership team before Aavas was carved out as a separate entity.
Aavas does granular, secured, small ticket size lending (Rs. 8 lacs avg. ticket size) in rural and semi-urban India with a focus on the self-employed segment. Similar to AU, Aavas has focused on in-house sourcing and collections with a high touch model which has led to significantly better asset quality compared to peers.
Aavas has been able to sustain spreads of 5%+ along with stable asset quality because of its deep presence in semi urban and rural India along with its ability to lend to customers who have no formal income proofs. Aavas is well capitalized with a capital adequacy of ~50% and will be able to sustain a 20-25% loan growth without needing any further equity infusion for the next 4-5 years,” he has said.
DCB Bank has been removed from the portfolio
Unfortunately, DCB Bank had to make way for Aavas Financiers.
Saurabh explained the reasons for choosing to jettison DCB Bank in the following manner:
“We have completely exited from our DCB Bank position in our portfolio. The reasons for the exit are:
(i) While DCB has historically been conservative in its underwriting, the impact of Covid-19 on DCB Bank has been higher than many other lenders due to DCB’s focus on the SME/MSME segments; and
(ii) the recovery for DCB will be more uncertain and will take longer than for the larger banks.
This is because DCB’s relatively smaller size and focus on the self-employed segment which limits the levers available to improve RoAs to pre-Covid levels and accelerate growth. The higher stress on DCB’s balance sheet is evident from the high restructuring loan book along with collection efficiency trends reported in the Q3FY21 results.
We therefore believe that unlike some of the other lenders which have frontloaded provisions, the impact of Covid on DCB’s profitability will not be limited to FY21 only but continue to impact credit costs in FY22 as well“.
Why is Mold-Tek Packaging a great small-cap stock?
It is well known that the Marcellus Little Champs portfolio has 15 stocks and that Mold-Tek Packaging is one of its prominent members.
Some of the other powerhouses in the portfolio include Garware Technical Fibres, GMM Pfaudler, V-Mart Retail, Alkyl Amines and Suprajit Engineering (click here to see the full list).
Saurabh has put the spotlight on Mold-Tek Packaging and explained its merits.
Mold-Tek Packaging is a leader in supply of injection-moulded rigid packaging in India across Paints, Lubricants and Food & FMCG industries. It commands one of the best operating performance track records in the packaging space with an average EBITDA margin of ~18% and pre-tax ROCE of ~20% over FY18-20.
Its’ competitive advantages are centered around the following:
(a) Continuing focus on innovation (plastic pails, pull up spouts, square shaped packs) which has helped it enter new segments and even grow market share in existing segments;
(b) Backward integration capabilities (eg. in-house development of moulds, robots, labels, etc) led by its technocrat promoters; and
(c) Customer stickiness surrounding quality, design, costs and development.
These competitive advantages alongside a significantly healthier balance sheet vs peers put Mold-Tek in a strong position to further expand its market share and target new growth drivers within the packaging space.
A number of other detailed reasons have been given as to why Mold-Tek is investment worthy which can be read at Marcellus’ Blog.