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They're
all there, the stable-if-slow elephants, the udderly milkable cows
and the roar-n-claw-baring tigers. Even some lumbering dinosaurs.
All concentrated in the upper reaches of the BT 500 for investors
to marvel at. And invest in. Scroll yourself down a few hundred
ranks to the last 100 of the list, however, and you will find yourself
shrugging from company to company. Just who are these guys? The
cats and dogs of the list.
Are they of any consequence? So long as returns
are spelt R-E-T-U-R-N-S, are denominated in a valid currency and
some are likely to outperform their peers, yes. They do all their
growling and clawing below the sensor-tips of the big investment
firms and research houses, and suffer from chronic public anonymity.
But that is also the reason that their upside potential is so high.
Remember, just a decade ago, few had heard of some of today's biggest
successes.
True, most small-cap Indian companies are entrepreneur
run. While this has some obvious drawbacks, there exist benefits
in terms of swift decisions, risk appetite and guerrilla skills.
"As a result," says Sivasubramanian K.N., Senior Vice
President (Equity), Templeton Mutual Fund, "dynamic and well-managed
small and medium-sized enterprises experience higher growth rates
than their more established, large-sized counterparts, which often
does not get captured in their valuations. And if identified early,
investments in such companies could give substantial capital appreciation
over time."
The flip side? They may languish in the shadows
for years and years, and you're not here to participate in some
ribbon-tying exercise at an obscure dog show. Even otherwise, the
risks are high, and the typical lack of transparency can be a big
put-off. Small businesses may not be resilient enough to withstand
shocks. Also, sleazy operators could turn these stocks into gambling
balls, which could unhinge all calculations. The good news is that
some of these risks are mitigated by strong parentage in some cases,
and by other factors in others.
So, with that out of the way, which stocks
should you look at?
Denso India
This supplier of electrical parts to the
cars and two-wheeler industries boasts a strong parent in Denso
Corporation of Japan, a $24-billion company that dominates the global
market for thermal and electrical systems. In India, Denso is faring
better than its competitors, MICO and TVS Lucas, and the demand
boom in the auto-ancillary sector is working strongly in its favour.
For the quarter ended June 30, it has shown a sales growth of 26
per cent, year-on-year. As Maruti Udyog, which holds a tenth of
the company's equity, expands volumes in sync with the current auto
upturn, Denso shines brighter.
Greaves
This, no spring chicken, is a turnaround
story in the making. As India's largest diesel engines and transmission
gear producer, it holds promise. What dragged it into the red was
its unrelated diversification into polymers (through Rajasthan Polymers),
a decision it has since reversed. Greaves has used the cash from
the divestment to clear debts. Its core business now seems set to
boom, thanks to the economic resurgence.
KPIT Cummins Infosystems
This software company would be a bet
on explosive low-physical-asset growth, as with the earlier software
cases. The difference is that this firm sees the future belonging
to software makers with well-tuned domain specialisations, as the
industry ascends the value scale. The company, with its Cummins
forbearance, has weathered the recent downturn rather well, scaling
revenues of Rs 73 crore in 2002-03. It has made an overseas acquisition
of Panex Consulting, a Houston-based sap consulting firm, for $1.7
million (around Rs 8 crore), which gives it ERP skills to augment
its sector-specific software capabilities in banking, finance and
manufacturing.
Heritage Foods
This is a case of a company left out in
the cold for being a quiet, modestly-tagged animal putting its mark
on unfancied territory. Processed food may be glamourous, but South
India's fresh milk market? The fact is, it has a firm grip on the
daily needs of Bangalore, Chennai and Hyderabad, from which is gets
85 per cent of its revenues (Rs 194 crore in 2002-03). Its profitability
is reassuring-with an operating profit margin of 14 per cent. It
is efficient in its use of capital, which it turns around particularly
fast. Its small capital base has resulted in a high ROCE (return
on capital employed) of 25 per cent plus over the last three years.
Its p/e? Less than five.
Savita Chemicals
This is another fundamentally strong company
that is not yet fancied by the market. What makes it so strong?
Take its R&D emphasis, to start with. Around 75 per cent of
its products are self-developed, a rarity in the transformer oil
and lubricants business. No wonder its exports in 2002-03 were up
70 per cent over the previous year. Other than that, the company
is thinking innovatively, as seen in the 3.8 mw wind power generating
plant it has set up in Karnataka. While volatile oil prices could
play havoc with its main raw material bill, the more noteworthy
story is the growth in demand from the Indian power and automotive
industries. The company sits on fat reserves (Rs 103 crore against
the share capital of Rs 8.76 crore), which alone could justify a
P/E higher than four.
Sintex Industries
Yet another sufferer in the shadows. Still,
Sintex continues as a generic name for water storage tanks in the
country, and commands more than two-thirds of the market. It has
successfully launched several other value-added plastic products
such as water harvesting systems, plastic doors and windows and
other pre-fabricated structures. The fact that few notice how far
plastic has come to invade our lives is evidence of its success.
If you expect plastic to play an increasing role in the material
world around you, buy this stock.
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