Shyam Sekhar’s portfolio and track record revealed
First, we have to compliment Shyam Sekhar, the noted value investor, for the number of multibaggers that he has snared in his illustrious career as an investor.
According to fine investigative work by Rahul Oberoi of ET, Shyam Sekhar has snared mega baggers like Hatsun Agro, KRBL, Pidilite Industries, Cera Sanitaryware, Jayant Agro Organics, La Opala Glass etc for his portfolio.
The stocks have given eye-popping gains.
While KRBL is up nearly 7,500 per cent (75 bagger!) in the last 10 years, Hatsun Agro is up 5,250 per cent and Pidilite 900 per cent.
The other stocks in the portfolio have also posted handsome gains.
It is obvious that we have to keep a close eye on Shyam Sekhar’s latest stock picks because you never know when the next pick might turn out to be a mega bagger.
Latest stock pick: Sarla Performance Fibers
Sarla Performance Fibers is Shyam Sekhar’s latest stock pick. He holds 13,41,917 shares as of 30th September 2017.
Sarla Performance Fibers is a micro-cap with a market capitalisation of only Rs. 445 crore.
It is engaged in the manufacture of “technical textiles”, i.e. “engineered textiles” which are used for high-end performance and technical functionalities.
According to a report by Krishna Karwa of moneycontrol, the global market value for Technical Textiles presently stands at nearly USD 144 billion. It is projected to grow at a CAGR of 5.8 percent and reach USD 200 billion by 2020.
It is also pointed out that Technical Textiles involve significant scientific know-how, higher capital deployment, and sufficiently large manufacturing capacities to meet specialised orders (that are typically placed by institutional clients).
This implies that the business has a “moat” because all and sundry cannot manufacture the product.
Anil Kumar Goel holds big chunk
Anil Kumar Goel is the single largest individual shareholder of Sarla Performance Fibers. As of 30th September 2017, he holds 27,34,750 shares comprising 3.28% of the equity.
In addition, Seema Goel, Anil Kumar Goel’s PAC, held 7,90,000 shares as of 31st March 2017. Her present holding is not known.
Mutual Funds hold big stake
Normally, mutual funds are not inclined to invest in companies with a market capitalisation of less than Rs. 1,000 crore.
However, Sarla Performance Fibers has, despite its diminutive size, attracted HDFC Small Cap Fund and HSBC Midcap Equity Fund.
The two mutual funds collectively hold 9.26% of the equity as of 30th September 2017.
The confidence of the mutual funds in Sarla Performance Fibers sends the message that the corporate governance and related aspects are ship-shape and there is nothing murky to worry about.
Sarla Performance Fibers meets the requirements of “profitability, sustainability, management commitment and corporate governance”?
Shaym Sekhar has declared in his ET interview that “Profitability, sustainability, management commitment and corporate governance are first things I focus on to spot a quality stock.”
Prima facie, the investment in Sarla Performance Fibers implies that the Company satisfies these criteria.
He also revealed earlier that he conducts a rigorous exercise before trusting a stock with funds. The exercise includes a “360 degree study of risks” etc.
When I ideate an investment, I fit it to a theme, do a 360 degree study of risks, see the merit in its valuation & find a safe price to buy.
— Shyam Sekhar (@shyamsek) July 11, 2017
It also appears that Shyam took advantage of heavy selling to tuck into the stock.
He noted in response to a query that the volume of selling in the stock is “definitely surprising”.
The volume of selling coming in is definitely surprising. Looks like a wave of selling is on. Maybe the actual clues will be in the Q1 nos.
— Shyam Sekhar (@shyamsek) August 28, 2017
This implies that he is of the view that the stock has been beaten down to a level which provides a high degree of margin of safety.
Promoters hike stake
The promoters, being members of the Madhusudan Jhunjhunwala family, have been nibbling on the stock and increasing their holding.
The holding rose from 55.23% in March 2017 to 55.51% in September 2017.
It appears that the promoters also took advantage of the incessant selling that the stock witnessed earlier.
Is Sarla Performance Fibers the “next Garware Wall Ropes”?
Saurabh Mukherjea of Ambit Capital recommended Garware-Wall Ropes to us at the Sohn India 2017 conference.
Saurabh explained that there is an insatiable demand for “technical textiles” from several sections of Industry and that Garware-Wall Ropes would prosper as a result.
The recommendation has done well because the stock is up 72% on a YoY basis and 154% over 24 months.
According to Krishna Karwa of moneycontrol, Garware-Wall Ropes and Sarla Performance Fibers are arch rivals in the market place and both will prosper from the burgeoning demand for technical textiles.
At the end of the analysis, Krishna Karwa has opined that Sarla’s valuations of 7.95x FY19 earnings are “undemanding” and that an improvement in the asset turnover rate can have a positive rub off on the earnings.
Buy Sarla for target price of Rs. 75: Centrum
Ankit Kedia and Varshit Shah of Centrum have conducted an indepth study of the affairs of Sarla Performance Fibers.
They have recommended a buy of the stock for the target price of Rs. 75 (31% upside from the CMP of Rs. 53). The logic is quite convincing:
“Favourable change in product mix leads to revenue beat
We maintain our BUY on Sarla Performance Fibers and TP of Rs75 as we value the company based on our conservative adj. OCF based methodology. We believe the sales growth of the company would continue on the back of higher contribution from industrial and performance yarn. While volume during the quarter was flat YoY partly impacted by implementation of GST, we believe de-bonding of Vapi would help in volume growth from H2FY18. Further margins would improve once the product mix changes and as sales from SOHL increase. Sarla Flex continues to disappoint and is currently at mere 15% capacity utilisation impacting profitability.
We believe any upswing in Sarla Flex can offer significant upside to our estimates.
– Q1FY18 result highlights:
Consolidated net sales rose 5.4% YoY to Rs791mn while standalone net sales increased 9.6% YoY to Rs670mn. Wind power sales declined 11.7% YoY to Rs22mn as the company has yet to sign PPAs for two windmills for which the revenues would be booked in Q2FY18. Operating profit fell 15% YoY to Rs157mn with margins contracting 475bps to 19.9%. Gross margin stood at 53.3% (down 508bps YoY) on consol basis with standalone gross margin at 48.3%. PAT was flat YoY at Rs91mn (inline with expectations) on the back of lower taxes and high other income.
– Standalone business grows at a healthy pace: The standalone yarn business posted gross sales growth of 10.2% at Rs686mn with exports growing by 5% and domestic sales growing by 17% YoY. Volume growth was flat at 2506MT and the bulk of the growth was driven by realisations. Sales were partly impacted due to implementation of GST during the quarter. Movement towards performance and industrial yarn helped in increasing realisation. SOHL posted revenue growth of 19% on the back of realisations despite volume growth of only 2% YoY. SOHL’s PAT increased 57% to Rs51mn.
– US business continues to disappoint: Net sale in the US business fell 31% YoY to Rs70mn on the back of a 25% drop in volumes. Currently the plant is running at mere 15% capacity utilisation. For FY17, the company posted volume drop of 36% since they lost a couple of major clients. Further revenue declined 37% to Rs343mn. The company posted operating loss of Rs14mn during the quarter against a loss of Rs3mn in Q1FY17.
In FY17 the company had posted an operating loss of Rs169mn. Further PAT loss stood at Rs17mn against a loss of Rs22mn in Q1FY17. In FY17 the company posted a loss of Rs115mn despite having high other income of Rs121mn. We believe the company would continue to post losses in the US business unless they are able to increase capacity utilisation.
– Estimates reduced; Maintain BUY: We have reduced our operating profit estimate by ~2.8% each for FY18E and FY19E factoring lower gross margin while PAT estimate has been reduced by ~4% each for FY18E and FY19E. We maintain our BUY on Sarla Performance Fibers with a TP of Rs75 as we value it on adjusted OCF (AOCF = OCF –Interest) to enterprise value (EV) yield. We believe bulk of the growth for the company would be on account for the domestic business due to debonding of the Vapi unit and higher exports though SOHL. Operating profit CAGR would be 15% over FY17-19E for standalone business. We believe there could be further upside from Sarla Flex with increase in capacity utilisation given the high fixed cost. Key risks being sustained losses in the US business and raw material volatility.”
Prima facie, it appears that Sarla will be yet another jewel in the portfolios of Anil Kumar Goel and Shyam Sekhar. However, whether it will be able to match the performance of the other stocks in the portfolio such as KRBL etc requires to be keenly watched!