One should understand that the fluctuations in the markets are inevitable and one cannot expect linear returns in Equity Market. Market returns are cyclical in nature which are caused by corrections and fluctuations in the market are followed by a phenomenal wealth creation journey. The lull period is the time to accumulate good quality companies that have earnings visibility and managed their capital efficiently and are available at reasonable valuation and there is an opportunity to make huge returns in the subsequent period.
Correction in the market?
The year 2021 was absolutely one of the best years for the small and mid-cap sectors. Small-cap Index has Year to date (YTD) rallied around 35%, supported by strong earnings growth in many sectors.
In the last few days, we have witnessed a reasonable correction (10% in the Smallcap index and 15-20% in few good companies) in the small-cap companies after a long time. If we check on long-term chart correction is not very big. But, we believe this is a good opportunity to start adding some lump-sum amount in the portfolio or increase your SIP amount for the next few months. E.g. if anyone has a spare amount of Rs. 10 lakh, then he can deploy Rs. 2.5 lakh.
Nifty Smallcap vs Niveshaay Smallcase Portfolio
Before this correction, we were guiding everyone to invest in SIP mode only. Now with ongoing correction, we changed our view on the market and believe this is a good time to add some lump-sum amount to the portfolio or increase your SIP amount for the next few months.
We firmly believe that our investment thesis remains intact and we believe that in the long run, our invested companies have the potential to deliver better risk adjusted returns.
In India especially, there are a lot of opportunities to find such companies as the management doesn’t explain its business very evidently. So, the probability of mispricing is very high. This is the time when one needs to remember the basics of investing to keep patience and slowly build a portfolio with a long-term view. Overall, we believe that we have a good set of companies in our portfolio and also a lot of quality companies have come down at reasonable valuations, these can perform well in the future with a 2-3 years investment time horizon.
Thank-you for choosing Niveshaay! We are glad for the trust you placed in us and are committed to provide you the best of our services. Thank-you for your continued interest and support towards Niveshaay.
Rain Industries Ltd. reported results that were exactly in-line with the expectations. The company was able to maintain normalised margins despite increase in raw material cost.
Please find the attached note on the quarterly result update of Rain Industries Ltd.
Why Indian Textile Industry? – Second largest employer after agriculture
– Contributes 5% to India’s GDP, 7% of industrial outputs in value terms, 12% of the country’s export earnings
Being, brought up in a textile family and living in the textile city of India, also led us to research this sector. Of course, there is no bias involved while presenting the report.
According to Maslow’s hierarchy theory, clothing is a basic and fundamental need. But, the industry working is quite different according to what the theory describes. This report aims to outline the same.
Apart from the supply chain re-alignment or ban on China, one more emerging trend is clothing is massively underutilized. The customers purchase more clothing than they will use and are quick to throw garments after use. Worldwide, clothing utilization – the average number of times a garment is worn before it ceases to be used – has decreased by 36% compared to 15 years ago. This is known as a fast-fashion trend.
In this report, we did an in-depth analysis of how the industry operates and which aspect of the value chain holds the most value and can provide us with great returns.
Generally, no single company in India has invested in the entire value chain from yarn to fabric to apparel.
A detailed note on the analysis is attached below.
Q1 FY 22 was absolutely fantastic for the Small-cap index, the small-cap index has delivered a 12% higher return to Nifty 50. Shares of Small-cap companies have been on a roll with the Small-Cap index hitting a new high in the last quarter.
Ample liquidity in the market combined with government efforts to revive the economy boosted the investor sentiments and took markets to higher levels.
It was one of the best quarters for Niveshaay. Our Mid and Small-cap focused portfolio was up by 44.88% and the Green energy portfolio was up by 35.38% in comparison to the 17.53% return of Nifty Smallcap 100.
Please find attached an analysis of Niveshaay’s Q1 FY 22 performance
Rain Industries Limited is a play on the global aluminum demand.
Rain Industries Limited (RAIN) is a leading vertically integrated producer of carbon, cement, and advanced materials products. The company owns and operates a total of 18 manufacturing facilities that manufacture products for its 3 business segments. These facilities are established across North America, Europe, and Asia.
The sale of its product depends on the overall aluminium production. Aluminium, Construction, Carbon black & Graphite are the major contributors to the overall revenue of the company.
Near decade high aluminium prices – The aluminium LME prices are at high levels since the late 2018 implying higher capacity utilisation for aluminium smelters. The management also guided that ~4 million tonnes of new aluminium capacity is expected to come globally in 2021. Out of this, 3 million tonnes would come in China in the form of new capacities or re-start of idled capacities. This will increase the market opportunity for Rain Industries Ltd. as there would be less exports of CPC from China and CTP to Middle East and South Africa.
Aluminium Capacity Expansion in India – Coal India will set up specific-purpose vehicles (SPVs) for about Rs 38,000-crore the green-field aluminium project, and an about Rs 23,400-crore aluminium smelting unit with state-run National Aluminium Company Ltd (NALCO).
NALCO to invest Rs. 30,000 cr for expansion, diversification in the next 6-7 years – State-run aluminium maker Nalco will invest around Rs 30,000 crore by the financial year 2027-28 on various expansion and diversification plans. With the proposed expansion plans of both coal India and Nalco, the probability of receiving a favorable outcome from the government to Rain for the commencement of new vertical shaft calciner plant becomes higher.
Bullish CPC and CTP Price Trends in 2021 – The Company is witnessing a good demand in CPC and CTP segment. But, one needs to watch the GPC prices too. It wouldn’t be difficult to pass on the increase in price because of the higher LME aluminium prices due to shortage of scrap and primary aluminium in the global market.
Earning upside from completion of Capex – Total Capex of $1 53( INR 1150 cr) million for Hydrogenated Hydro Carbon (HHCR) Resin, Vertical shaft & Anhydrous Carbon Pellets( ACP) Plant The EBIDTA contribution of these plants can reach $50 million on ramping up by end of 2022
Cost cutting measures
Closure of Netherland facility – The Company has closed operations of plant situated at Uithoorn, Netherlands. The division mainly catered to printing ink adhesives, which witnessed slower demand and exhibited eroding profitability.
On 31st Dec, 2020, the company sold two of its subsidiary for Rs. 637 crores. The funds would be utilised for repayment of debt resulting in Rs. 32 crores of interest savings per annum. The management has also guided that no new capex in line for some time, the focus would be on to reduce debt. They also guided on the reduction of overall interest rate from 5.5% to 4% in next one and half year.
Deleveraging – The company has high debt on its book. The management is guiding that no new capex in line for some time, the focus would be on debt reduction.
Cash profit upside in the next 2-3 years
Expected free cash flow in next 2 years
Watch our complete presentation on InvestingHub.
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Small caps have been on fire recently. They have been such great out-performers and have been the talk of the town within the Indian Financial markets. People just can’t stop talking about them. With a long period of muted performance, the smallcap stocks have now performed exceptionally well in the last one year. To make more sense of this phenomena, Smallcase and Niveshaay sat down to have a talk on the Trailblazing Performance of smallcap stocks.
1. Small caps have been on the rise and they’ve been skyrocketing! What could be the reason for smallcaps to rise at a time like this?
2020 was an eventful year for equities. The markets were at all-time high in Feb, 2020 and then entered bear territory in no time and hit the low in March-2020. It did make a comeback very quickly. Amidst these, mid-and small cap companies emerged as market favourites in 2020. The primary reasons were:
i. Performance Attribution
Sector Representation: Constituents in the indices play an important role in determining performance
The NIFTY 50 gives a weightage of 37.82% to financial services which is quite high as compared to 14.58% in NIFTY SMLCAP 250.
The weightage of the Chemical and Pharmaceuticals sector is around 14% in the NIFTY SMLCAP 250 as compared to 3% in NIFTY 50.
If we analyse the past year’s performance, one can infer the out-performance of the Chemical and Pharmaceutical Sectors vis-à-vis the Financial Sector. This precisely explains why small caps have been on the rise during the last year.
Now, if we dig one step further and analyse the top constituents of the NIFTY SMLCAP 250, we can deduce that the high growth technology platform companies like IEX, CDSL and Tanla Platforms Ltd. have also performed well in the past year. This also explains the rise in small-cap indices.
Top constituents by weightage in Nifty Smallcap 100 –
ii. A Historical Perspective- It’s interesting but things change beyond our expectations at times
Cyclicity is the fundamental nature of equity markets: Small and Mid-cap had a tough ride before
If we look at the charts of small and midcap companies, they were all beaten down from their peaks of 2018. This paved the way for good upside potential.
*Source – Marketscreener
Similar scenario was observed from April 2012-2014 when the small and mid-cap indices under-performed the large cap index. This was followed by a good rally from May-2014 to Jan-2018 in small and mid-cap generating 33% CAGR returns.
iii. Multi-fold increase in market participants
Active retail and HNI participation also explains the rally in small and mid-caps. The number of demat accounts at CDSL stood at 2 crores in Jan-2020. The number grew to 3.34 crores in March-2021. Around 98.4% of the total new accounts opened comes from retail investors.
This resulted in inflow of liquidity into smaller stocks. In a rising market, small-cap tends to grow faster than large cap which is generally preferred by institutional investors.
2. Small caps have been giving some exceptional returns after a period of muted performance. What could be the reason for this?
Liquidity, low interest rate and currency stability in the past year explains a good rally in small and mid-cap index after a muted performance.
Small sized companies rely on external capital for their growth as compared to large companies. Higher interest rates means higher cost of capital. This results in growth becoming more expensive. If the interest rate is lower, that means the denominator while estimating the valuation is lower resulting in higher estimated valuations for small companies.
Also, low interest rates create liquidity. This resulted in more money coming into equity markets.
Small and Mid-Cap trading at attractive valuations
The small and mid-cap indices are far more volatile than large cap. During the March lows, many good quality small cap companies were trading at attractive valuations. Ample liquidity in the market combined with government’s effort to revive the economy, positive FPI inflows boosted the investor sentiments and took markets to higher levels including the small and mid-cap stocks.
Last One Year Performance Chart of NIFTY 50, NIFTY SML 100 & NIFTY Midcap 100
*Source – Marketscreener
3. What are the risk factors that need to be taken into account before investing in smallcaps?
Investment Horizon: The time horizon should be around 3-5 years to generate meaningful returns.
Volatile and Illiquid Nature: Small cap stocks are more prone to market fluctuations and take time to recover from market recessions making them volatile in nature. Also, it offers less liquidity to investors. Sometimes, it becomes difficult to sell.
Change in macro factors and market fluctuations: An increase in interest rate can change the sentiment of investors. Any reversal in bond yields could lead to a sharp correction in the global equity markets. Small caps correct faster than the large indices. Growth stocks valuations are more sensitive to change in interest rates. The lower growth rate in GDP than expectations also can hurt small caps.
One should do thorough research in these stocks before considering them as an investment avenue.
4. What does the trend for smallcaps look like moving forward and how long can this last?
Recovery in the earning cycle – Generally, a favourable cycle for small caps sustains for 3-5 years. It is necessary to move down one level to find out which sectors in particular can do well in the coming years. Sectors such as pharma, chemicals and capital goods continue to perform well. Companies should have good earnings visibility, exhibit demand recovery after the unlocking of the economy.
Corporate profit to GDP ratio hits a 10-year high of 2.63% in FY21 – The combined net profit of the listed companies was up 57% to 5.31 trillion in FY 21. Improvement in operating margins and lower cost of capital boosted companies’ profits to a decade high. The corporate profit share in India’s GDP hit a 10 year high of 2.63% in FY 21, it was at a record low of 1.6% in FY 20.
Large blue-chip companies were already earning well and were not much impacted in previous years. Major growth in FY 21 ratio came from cyclical, mid and small-size companies.
Nifty 50 vs Nifty 500 EPS Growth in the last 1 year
*Source – Trendylyne
The increase in earnings ratio signals that the unlisted or unorganized players were affected the most during the lockdown.
The shift from unorganized to organized sector– In 2017, after demonetization and GST, many small and mid-cap companies increased in the hope of the shift from unorganized to organized sector, but the shift was not meaningful at that time.
Sectors such as apparel, tiles and sanitaryware, plywood, textile, footwear, logistics, electrical equipment, and plastics form a higher composition in the unorganised sector. After unlocking the lockdown, this shift seems clearer and also visible in earnings of the last few quarters. Some of them may see erosion in profits while the others might fail to survive. This will help listed mid and small companies to gain market share in the sector.
Government Policies – Large companies have a strong product portfolio and a competitive advantage over the peers. These companies are generally less dependent on government policies and competition from outside India. The focus of the government on Make in India, PLI Scheme and the imposition of duties on import of products and other initiatives to support domestic business will help mid and small-cap companies in expansion, improving competitiveness and margins.
Higher GDP growth expectation on a low base – The RBI has projected FY’22 GDP growth at 10.5 percent, while IMF puts it at 12.5 percent. The World Bank sees 2021-22 growth at 10.1 percent. Higher growth expectation scenarios help more mid and small-cap companies.
5. What could be the easiest way for investors to have a share of the pie with heavy returns?
Niveshaay is a SEBI Registered Investment Advisory Firm with a Dedicated Research Team specializing in unearthing high quality undervalued stocks. We are focused on mid and small cap companies.
At Niveshaay, we have continuously invested in stocks that are available reasonably and have huge earning potential upside.
We have designed ‘Mid and Small Cap Focused Portfolio’ on smallcase
It is a portfolio which constitutes more than 70-80% allocation in quality small-cap stocks.
Our portfolio is perfectly suitable for an investor with a time horizon of 3-5 years, and strongly looking for long-term investments.
We have been live on the smallcase platform since Sep 2019. The unprecedented COVID crisis was the most stringent stress test that one could have applied on their portfolio companies. We have proved our strategy on the platform by outperforming the index returns with good margins.
Live Performance of Niveshaay’s Smallcase Vs Equity Small Cap Index
Live Performance of Niveshaay’s Smallcase Vs NIFTY Index
You can checkout Niveshaay’s very own mid and smallcap smallcase here – https://niveshaay.smallcase.com/smallcase/NIVMO_0001
This is a portfolio of stocks, which will get benefit from the energy transition. Energy transition refers to the global energy sector’s shift from fossil-based systems of energy production and consumption — including oil, natural gas, and coal — to renewable energy sources like wind and solar, as well as other sources like biofuels.
To know more about the portfolio please click on the mentioned link
The best way to play the solar boom in India – We currently are at an extremely exciting juncture where it is now amply clear that solar PV Technology is the most scalable globally and it’s becoming less prone to disruption as the technology is maturing and a lot of global giants are emerging catering to various components of the PV module manufacturing.
The company that we have chosen has an even more interesting position in the market, as it’s the only player in India which has struggled to compete with large Chinese manufactures over the past decade and hence not been able to grow much profitable but now after many years of struggle the company has been able to come at the lower side of the cost curve to compete with the global giants.
Borosil Renewables is part of Borosil group and only domestic manufacture of PV glass in India.
Please find the attached detailed research note on Borosil Renewables Ltd.
