Vijay Kedia’s Latest Micro-Cap “Safe” Stock Pick Is Backed By Blue Chip Behemoth L&T

In his latest interview, Vijay Kedia revealed that he is diversifying widely because he is not confident of buying a huge chunk of any particular stock.

Vijay Kedia also revealed that he is now primarily looking for “safe stocks” where one is assured of the return of capital with a reasonable return.

In fact, Kedia also identified three stocks from his portfolio as being “safe stocks” for his fans to consider. These are Bharat Electronics, Repro and Sudarshan Chemicals.

To that elite list of safe stocks, one can add Vijay Kedia’s latest stock pick, Salzer Electronics.

Kedia has bought 200,000 shares of Salzer Electronics in the quarter ended March 2015. His investment is worth Rs. 4.54 crore at the CMP of Rs. 227.

Salzer Electronics is a micro-cap with a market capitalisation of Rs. 233 crore. It is engaged in the manufacture of electronic products like rotary switches, toroidal transformers and wire duct products.

The unique aspect of Salzer is that L&T, the behemoth with a market capitalisation of 1.62 lakh crore, is the single largest shareholder with a 26% stake. L&T has two directors on Salzer’s board. How and why a giant like L&T got interested in a minnow like Salzer is not known. However, the fact is that Salzer has benefitted because it has a marketing tie-up with L&T which contributes to nearly 40% of its total revenues. Also, the L&T association has attracted heavyweight customers like General Electric and Schneider Electric to deal with Salzer.

Sharekhan was one of the first to spot the potential of Salzer. In September 2014, when the stock was languishing at Rs. 137, Sharekhan sent out a buy call on the basis that the gradual revival in the domestic capital expenditure (capex) cycle in the key industries and an improvement in the project spending, would result in strong growth in the company’s earnings. Sharekhan also predicted that after a stagnant net income growth over FY2012-14, Salzer is well poised to deliver a CAGR of around 50% in the earnings over FY2014-16.

Sharekhan also emphasized that Salzer is a consistent dividend paying company with a pay-out of around 20% (the company maintained the pay-out ratio even when its earnings growth was muted). It also opined that Salzer deserved a better valuation multiple given the significant improvement in the earnings and the fact that L&T is its largest shareholder and marketing partner.

Now, the best part is that all of Sharekhan’s predictions have come true. The stock is up a fabulous 65% since their recommendation.

However, Vijay Kedia’s purchase of the stock shows that it is still not too late to tuck into the stock.

According to a recent report in the ET, Salzer Electronics is looking to double its turnover to Rs 600 crore in three years and is also in discussions with some European manufacturers to develop and market large transformers. ET pointed out that with these new ventures and strategy for expansion, Salzer is looking at 30 per cent growth in the next three years.

ET quoted D Rajesh Kumar, Salzer’s JMD and CFO, as stating that “the turnover is expected to touch Rs 390 crore in the current fiscal, Rs 470 crore plus in the next fiscal and Rs 600 crore at the end of the third year.”

ET also revealed that Salzer has enteted into a technological tie-up with an USA company called ‘C3 Controls’ which will enable it to produce two new electronic products. These products would be sold in India and the USA. It is also stated that Salzer will focus on exports to African countries like Kenya, Tanzania, Egypt and Tunisia and Eastern European nations like Romania, Hungary and Poland.

So, if these ambitious plans comes true and Salzer’s turnover does double in three years at a 30% CAGR, Vijay Kedia stands to make a pretty packet on his investment. The best part is that Vijay Kedia is not taking much of a risk because Salzer’s impeccable parentage and generous dividend payout will protect the downside. So, Salzer is indeed a “safe” stock worthy of adorning every portfolio.