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Wednesday, December 5, 2012

Your Queries on Microcaps!

I have received a few queries regarding analysis on Microcaps. Microcaps are very small firms with Market Cap less than 100 crores or so and some of them even have annual revenues less than 50 crores.

It’s a trend within retail investor community to search and invest in Microcaps with unheard of names. Whereas, if you investigate a Mutual Fund portfolio, most of the names in their portfolio would be large caps, whatever the fund focus might be, and very few large midcaps in addition to large caps.

This is surprising and counter-intuitive behavior! Large funds and institutions have the muscle power, bandwidth and battery of experts to research small and upcoming companies and spot the next Infosys and Reliance. That kind of analysis would bring them super-returns on their portfolio. But they stick to larger, well known names only!

Whereas retail investors cannot visit a small new company’s office, cannot even attend the AGM, and don’t read through the annual report, but put all their savings in unknown small and micro caps to get the promised larger returns with larger piece of risks as well.

Strange are the ways of market!
Now back to the questions:

Question: Can you please help me analyze Menon Pistons and Cenlub Inds and decide if I should invest. It will be a great help.

Answers:
Menon Pistons

Menon Pistons looks like a decent micro-cap to me. Annual revenues have doubled in past 5 years from Rs 83 crores to Rs 167 crores or so. EPS has doubled in this duration from Rs 8.4 per share to Rs 19.6 per share.

Current PE ratio is reasonably low at 4.4 and Book Value is at 101, is higher than current market price of Rs 86 and is growing YoY. Good dividend paying stock at that.

Promoter ownership is very high at 74.37% and is consistent. Only worry is very low daily volumes, it is showing only 60 stocks traded today. So no institution would be able to buy in this microcap, as is the case with many other microcaps. Also its trading very low, close to its yearly low of 81, so any small push down can push the price down.

Fundamentally I can’t see anything wrong with this pick. One Menon Bearing is also trading with better volumes. That also seems decent scrip.

Cenlub Industries

Cenlub also seems to be a decent microcap, with a very low market cap of 14 crores or so. Daily volumes are slightly better here, with 2400 shares traded today as we speak. Annual revenues have more than doubled in past 5 years, from 14.5 crores to 35.5 crores. EPS also shows trend of improvement from 2.5 to 6.5 in same duration.

Firm has low PE ratio and is dividend paying scrip with high Book Value of 27 in comparison to current market price of 34.6.

Worrying factor here is high retail shareholding, which is as high as 51.46%, whereas promoters have 41.24% shareholding. Other than this, fundamentals seem to be reasonably well and stock seems to move well on charts.

Indowind energy 

Question: Can you please help me in researching a stock?

I want to know about Indowind energy. Also please comment on the recent FCCB issue which is due to expire in Dec 2012. I am unable to understand the fact that if FCCB are to change at Rs 25/- then how is the company going to meet the demand (CMP 5.3). In such scenario, the stock should crash. But here it is rising daily (increased by 40% in one week). Hence please educate me.

I am an Endocrinologist with good interest in equities as my hobby.

Answer:

Sorry for the brief answer on this one. My initial recommendation would be to stay away from the stock as high retail public holding at 48% and its growing QoQ. Also penny stocks (CMP less than 10) can get manipulated easier by operators.

Uneven quarterly/annually result pattern exists. Quarterly revenues vary between 2.6 crores and 11.2 crores in last 5 quarters.

This may be an interesting company in Wind energy and renewable energy space, but difficult to separate wheat from chaff in such excitingly new sectors. Biggest names in wind energy like Suzlon are biting the dust right now. So can’t really trust very small names.

Right now there are much better stocks to invest in. Pls look at some midcaps with brand names, as these would get the attraction once Midcap bandwagon starts to move.

Hope this helps. Pl keep visiting and writing in.

3 comments:

  1. Sandesh MascarenhasDecember 5, 2012 at 3:33 PM

    can you write something about Kingfisher Airways

    ReplyDelete
    Replies
    1. Dear Sandesh,

      I looked at revenues for KF in Sept quarter. Its just about 200 crores with 600 crores loss! And maybe next quarter may get worse with almost total shutdown.

      At this point, its just like a lottery ticket with some investor hoping to come onboard. Not recommended.
      Hope this helps.

      Regards,
      Naren

      Delete
  2. Hi ,

    I really like your blog. It has given me some really good insight into equity investment.Many thanks and keep on your good work.

    Can you please do analysis of Harrisons Malyalam ? what you think of this company in long term.

    ReplyDelete

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