Screen Testing Four Small Cap Companies
Readers of this blog have few suggestions for investment ideas or stocks. They have requested to provide my comments and my observations about these stocks. Following are my thoughts. Before you go through them, please understand that these observations are for my objectives.
MIC Electronics Limited (MIC): The Company is a global leader (who made them global leader?) in the design, development, and manufacturing of LED Video Displays, LED lighting solutions, and Embedded Systems/Telecom Software. Most of its revenue come from LED Video Displays, that have become an integral part of sports stadiums, transportation hubs, digital theatres and theme parks, advertisements and public information displays.
- Operating Cash flow (consistently negative)
- Debt (higher than cash flow)
- Dividends (yes, but less than 10% payout)
- Reported Net Profit (positive)
- Margins (positive, and all increasing)
- Here is what I do not understand. The company has negative operating cash flow, meanings it is sucking in cash consistently for last four years. But it is still showing profits. How is it making profit?
- Approximately 40% to 45% of its revenue is in sundry debt. Meaning, its customers are not paying them for their services or products. This could likely explain why its cash flow is less.
- On the positive side, it has more than enough working capital.
- These observations keep me away from MIC Electronics.
Nava Bharat Ventures Limited (NBVENTURE): Originally, this company was manufacturer of ferro silicon and was one of the largest Indian exporter of ferro alloys. It also has sugar production facilities and sugar by-product (rectified spirit and extra neutral alcohol). Over time, this company has started venturing out in power generation and infrastructure projects (e.g. special economic zones and real estate development). It also started a fully owned subsidiary for trading activities (mineral resources and ferro alloys).
- Operating Cash flow (positive, increasing, but less than net profit)
- Debt (high, higher than cash flow, almost same has net profit)
- Dividends (yes)
- Reported Net Profit (positive)
- Margins (positive, and all increasing)
- Capital usage (good, more than 30%)
- My observation is; other than debt and cash flow, it seems to have good balance sheet.
- If I have to hold it for long time, then I need to understand what the company wants to do. It seems to keep venturing into next hot market, first sugar, then power generation, then real estate, and now material trading. Trading is an activity that has less investment and tends to increase margins and returns.
- I am on the border line about this company vis-a-vis its role in my portfolio. I already have exposure to power generation industry. I will continue to wait, watch, and keeping reading more to understand its future direction, and how it is able to keep good dividends.
Cords Cable Industries Limited (CORDSCABLE): It manufactures LV Power & Control cables, Instrumentation cables, Thermocouple Extension cables, Compensating cables, telephone cables, panel wires & Customized cables.
- Operating Cash flow (increasing cash flow, in 2009 it is higher than net profit)
- Debt (higher than cash flow and net profits)
- Dividends (yes)
- Reported Net Profit (positive, overall increasing)
- Margins (positive, improving until 2008, dropped to single digits in 2009)
- Capital usage (reducing trend)
- In 2008, it was listed as a part of Asia’s best company under one billion dollar.
- The Company has made efforts to diversify its revenue and market. Considering the expenditure in infrastructure, this company is in the right sector. It does not have a great history in past, but management seems to remain focused on its domain of cables.
- I would read more about Cords Cable and review this in the context of my long term buy and hold portfolio.
Dai Ichi Karkaria (DAICHI): This Company is focused on manufacturing of high performance specialty chemicals such as surfactants, additives, and specialty polymers for different types of applications. Such chemicals are used on variety of industries such as Textiles, Metal Treatments, Pesticides, Rayons, Oil Industry, and water treatment plants. I personally like companies that have niche positions.
- Operating Cash flow (very inconsistent)
- Debt (low)
- Dividends (yes, but very high payout factor of 70%+)
- Reported Net Profit (positive )
- Margins (negative OM/GM, very low NPM)
- Capital usage (TBD)
- It has very low institutional holdings, and owners take away almost 70% of EPS as dividends! The question is; if owners think that valuation is likely to increase, then what motivates them to take away most of the profits.
- These observations keep me away from Dai Ichi Karkaria.
I would like to reiterate that I am saying these companies are good or bad in itself. The fact that they are in business and keep growing suggests that they are profitability run by their management. The observations I made here are in context of my objective for my long term buy and hold portfolio.
What are you thoughts? Do you agree? What is your observation?
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I agree with your analysis but more often than not its the qualitative factors like the kind of business & the respective opportunities available, management,etc which plays a major role in determining future stock prices. I am personally invested in MIC Elect. & I feel the kind of business it is in is scalable and holds good domestic potential especially in good times. But then qualitative factors are more of personal judgment and can be wrong
.
Hello Amit,
Good point and very true. I would tend to agree with your viewpoint. Few points for your to ponder:
To me, trying to estimate future stock price is a futile task. The estimate/expectation should be continued increase in value of the business, (and) my personal return = increase in value of business + dividends.
To me, I do not end at qualitative aspect. Qualitative characteristics, should reflect on business.
Basically, when I look at MIC in the context of my objectives, it misses the mark by a lot. It is out of bounds for me, until its operating cash flow is positive, and its sundry debt reduces.
Best Wishes,
eligible for 2 points
Thanks for reviewing CordsCable.
I am not sure what you meant with Capital Usage.
Yeah, margins fell to single digit, not sure why that happened, maybe bcoz its exports took a hit last year(as I hear from my sources…got a frnd working in corporate sales)
Also, considering debt conditions compared with peers looks good…as in this industry almost all the companies are typically leveraged. Good thing is, Cords’ paying it back.
Off the motive of this blog, when I look at it technically, it has just started its C wave. I expect it make go uptil 90+ in a year.
Regards
Yogesh Tiwari
Hello Yogesh,
Thanks for inputs. I will keep that in mind when I continue to read more.
Best Wishes
eligible for 2 points
Hello Sir,
Could you have a look at hyderabad industries.They have come out with their 3rd Quarter results today.Although sales and net profits are flat,the valuations are attractive.
Expected to post a EPS of more than 100 for this fiscal year (so far 86 done),and PE is 6.so there could be some upside left.
Thanks
Saif,
I am passing HDIL and have left it
. I do not plan to revisit.
This is the risk I am willing to take, I am happy to let go a possible winner.
My apologies, couldn’t help you here.
Best Wishes,
no problem sir…any particular reasons for avoiding hyd industries..
thanks
Sorry sir…i had a look at archives and you have indeed covered hyd ind before..and also the reasons for it not fitting into your investment horizon..still a lot to read and understand in the archives..will come back when in doubt..
thanks
Saif,
You found it…..
Hi Tip Guy,
This qn is not related to this article, but a basic doubt. Qn is … suppose one day share of ABC closes at 50 Rs… and lets say next day market opens with a gain…..
1. how market opens with a gain over-night? like if it is closed at 3000 points, how can it open at 3010 points next day?
2. Same qn for the price of a stock as well… if one closed at 100 Rs today.. how can it open at 105 rs/ 98 Rs next day?
Is this based on the first order comes to market next day…. like if majority orders comes with higher bid to shares.. markets open with higher points or vice versa…..
If it is not appropriate to reply here… plz mail to my ID, or may be an article on the same might be helpful to other blog readers.
Thanks
Hello Young@Market,
I have few different reasons for your question, but I cannot say with confidence. All are half baked answers….
(1) index or individual security, the closing price is determined based on weighted average of all of the trades in last 30minutes. since it is an avaerage, it actual close could be higher or lower, hence it may appear different the next morning.
(2) after market hours block deals, options exercise, etc may change pricing a little bit. Consolidation of all trades could result in this changes.
(3) value of first order than came in…
Again, I do not know for sure, I am just speculating.
If there is any readers who knows this, then please share it here…
eligible for 2 points
Sir,
What is your view on Micro Technologies, Symphony comfort, VST Tillers and Mazda?
Hello Naveen,
Too many companies!
I will add to my screen list.
Thanks for the suggestion.
Best Wishes,
For screen testing, I found these 4 companies as good ones. consistent growth in sales, profits, margins, low or nil debt, positive cashflow and almost leadership position in their segments.
Hope you and other readers in the blog can throw some more light on these 4 stock to help build some more long positions. I hold all 4 stocks in my portfolio though in small amount.
Hi TIP Guy,
did you get a chance to read about cords cable? I am early waiting to read your analysis.
Thx
Biren,
work in progress
Best Wishes,
I beg to disagree on MIC electronics. I think with India’s GDP growing, infrastructure growing, there will be more need for such large energy efficinet LED displays. places like malls, metros, railways, airports etc will need large display and MIC is excellent products to support that growth. Being a small cap it should be expected to have volatile balance sheet and price fluctuations. your comments are welcome.
is that sufficient to decide to invest on to a company or do you make further in-depth analysis to pick the stocks, though Financial figures tells you story…
we should also see other side of a coin..
some time we tend pick stocks since we like them.. a thorough study is required while picking stocks..
Hello GI,
Is this addressed to me?
yes
Tipguy.
Excellent work. But for some reasons I disagree with you on MIC electronics. LED is altogether a new technology whose power can be unleashed and meet the requirements of the growing power needs.
Coming to the operating cash flow,i understand that you said, it’s constantly negative. Is that the only reason to be away from this counter ?
Also one more request. Can you please throw your light on Prajay Engineers Syndicate ?
Sir,
you said in this post in January MIC does not fit into your scheme of things… well, the stock has not done anything in last 7 months… at best is it down quite a bit in percentage terms.
I salute you.
looking for more stock takes from you.
Good to know. Thanks.