Midcaps and small caps have outperformed large cap in the last 12 monthswith an increase of 77.50% YoY and 86.05% respectively vs 53.56% for YoY rise in the nifty. NIFTY however continued its stellar run in the month of September led by the return of FIIs. Sentiments were further uplifted by approval of PLI schemes to boost domestic manufacturing capabilities of the industries and approval of a relief package for the telecom sector that includes a four-year moratorium on payment of statutory dues by telecom companies as well as allowing 100% foreign investment through the automatic route by the government. Stocks from these sectors remained in the limelight although markets as a whole are expected to stabilize after the stellar rally.
Here are two small cap companies in which we are bullish:
1. Inox Leisure
With vaccination rates increasing, sentiments are appearing to improve as well with ‘Retail and recreation’ mobility, which should lighten fears of another COVID-19 wave. The content pipeline looks strong, with several tent-pole movies rushing to book release dates, starting with the Diwali release of ‘Sooryavanshi’ in November 2021. Though the domestic box-office is still tepid, overseas markets have witnessed significant improvements in 2HCY21 so far, which promises well for India cinema sector, and should start reflecting in better consumer confidence. The two big US studios, Disney and Warner Bros, have announced exclusive theatrical releases for several big-ticket movies. We have upgraded on our revenue/EBITDA/PAT estimates on INOX and reiterate our ‘Buy’ rating with FY23 target price of Rs 490, based on a target EV/EBITDA multiple of 10.8x.
We prefer INOX over PVR on a relative basis though on an absolute basis both are doing well, but we would like to go with INOX due to low valuation as compared with PVR – as we believe that there is more scope for operating metrics improvement in the former. The comfortable balance sheet position of INOX is the other big positive. INOX executed a successful equity fund raising of Rs.250 cr at Rs.255 per share and part of this has been utilized for paying off debts and towards operating expenses. INOX is net debt free as on 30th June 2021.
2. Somany Home Innovation Ltd.
The management is committed to increase its capital allocation towards fast growing profitable segments. SHIL has been scaling up its presence in consumer appliances and plastic pipes and fittings categories which are currently growing at very healthy rate. Company will enter into business which generates RoCE in range of 20%-25% in long run. Further, its robust supply chain and strategic outsourced manufacturing enables the company to offer a wider product basket with minimal capital expenditure.
As per the management, company has started its growth journey and strong earnings growth registered in Q1FY22 will be sustained in the long run.
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We believe that its each business segment has huge growth potential and can outperform industry growth. Company is expected to register 200 to 300 bps incremental improvement in gross margin going ahead with volume growth and scalability. Thus, we hold our Positive view on SHIL and believe that it could be a compounder story in long term. We recommend this scrip with target price of Rs.611 with a 12 months investment horizon perspective. At current price, the scrip is valued at P/E multiple of 21.5x on FY23E EPS.
Views expressed in this article are the personal opinion of Achin Goel, Fund Manager, Bonanza Portfolio Ltd.