This is the seventh and the last post in our quarterly update series for Q1 FY20.
In this post, we’re sharing the latest updates of the stocks from our watchlist. Please don’t treat this as a buy recommendation. We find these businesses interesting and we may build position (or buy more of those that are already in our portfolio) in them in the future. The purpose of this post is to bring clarity in our understanding of the businesses we are tracking. We make our notes on the quarterly results and conference calls. Putting it up here makes it easier for us to refer them at a future date.
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Please click on the read more button for more details on each stock.
Amber Enterprises has cemented its position as a prime AC and AC components manufacturer in India. They have achieved phenomenal growth in the recent path and are expected to stay on course for the next few quarters. The company has done well to establish themselves as a one-stop solutions provider for the AC industry and has thus managed to mitigate any drop in outsourcing from the components supplying business. The company guides that more than 20% growth is expected for the entire industry. So far the industry has not been adversely affected by the current economic slowdown like other home appliances like TV. It remains to be seen whether the industry and the company shall be able to stay immune from the economic conditions in the country and whether the projected growth rate of the industry is sustainable for the next few years. Return on equity for the company is not very attractive at the moment. Hence, it remains to be seen if the ratios improve in the coming years. Nonetheless, being a market leader in AC & AC component market in India, it should be tracked closely.
Ashok Leyland has consistently proven themselves over the years as the market leader in India for HCVs. They have remained resilient in the current auto market conditions and have pushed to maintain their margins and grow their market share organically. They are also staying ready to act on any important developments like BS-VI. The company is working hard on bringing down their inventory to optimal levels and they expect to have temporary shutdowns to do so. The company has been working well without a CEO figure mainly on the back of their excellent upper management team. The falling exports is a big concern for the company in a period of waning domestic demand. It remains to be seen whether the company will be successful in reviving exports and whether the defense orders will come in the time anticipated by the company. Nonetheless, given their dominant market position and the management focus on staying resilient and not pushing aggressively in current market conditions, Ashok Leyland is a stock to watch out for given its current valuation. However, the biggest challenge is to predict when the CV cycle will turn for the better.
AU Small Finance Bank
AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves as a commercial bank accepting savings and term deposits. They have also pivoted to used vehicle finance from new vehicle finance showing that they are ready to make wholesale changes in their operations when required. The management admits that the company is going through a transitionary phase and all of the company’s operational goals and mechanisms have not been set in stone yet. Given the current economic environment, the company has delivered exemplary performance and their focus on not over-expanding their branch banking at higher costs and keeping operational low has helped them maintain a stable RoA which is expected to rise once their branch banking operations break even. It remains to be seen how long the company will be able to maintain its growth momentum or what commercial or business focus area they will settle on. Nonetheless, given its good recent performance and the healthy loan book with stable NPAs, AU Small Finance is a good stock to watch out for, especially for any investors banking on the theme of microfinance.
KNR Construction is one of the leading companies in the EPC work. It has a majority of projects in the roads and highway sector. With more than twenty years of experience in project execution and focus on quality work and timely completion has made a lot of name for them. Given the strong visibility of revenues due to healthy order book built up and their relentless focus on balance street strength, they are in a strong position to benefit in due course. Valuation at current levels is also very reasonable. They have a commendable Balance Sheet strength due to better working capital management and low debt on books. It is rare to find a construction company which has been consistently managed to produce free cash flows even in tough environment. However, the ability to translate order book into sales in a reasonable time would be a key metric to watch in the near term given the slowdown fears looming large.
Manappuram Finance has long been one of the trailblazers in the NBFC segment catering to personal finance in India. They have a robust and resilient gold loan business forming the nucleus with many other business divisions like microfinance, housing finance and vehicle finance as other avenues for lending. The company has done well to develop these divisions particularly the microfinance division. The company has also maintained a healthy liquidity profile and is also planning to expand into life insurance operations of its own given its wide distribution network. It remains to be seen how long they shall continue to stay immune from the ongoing liquidity situation in the NBFC space and whether their plans for restructuring their stressed assets in the housing finance division will go as planned. They need fund-raising for the capital infusion required to expand their microfinance division and launch their life insurance operations. In the current economic environment, it may be a tough ask to raise funds. Nonetheless, based on their consistent historical performance and their success in raising different business lines other than their flagship gold loan business, Manappuram Finance continues to be a good stock to keep an eye out for, particularly given their resilience in the current economic conditions.
Satin Creditcare Network Ltd
Satin Credit Care is one of the few MFIs with a pan India reach and the enviable record of zero net NPAs in India. They have done well to expand their reach across the country and maintain their robust operations. The company is still in the transitionary phase where they introducing and experimenting with a number of concepts and products. The company has a lot of ground to cover in order to be able to achieve its ambition of being the foremost pan India MFI provider. So far the company has not faced any big delinquency issues and have managed to stay untouched from the current liquidity tightening. It remains to be seen whether the company will be able to achieve its revenue growth target of more than 30% for FY20 given that its revenues have grown only 8% in Q1. Nonetheless, given their wide reach and under-penetration in most of their markets and their focus on maintaining their stellar level of operational efficiency, Satin Creditcare is a good stock to keep an eye out for anyone banking on the themes of increasing consumption and microlending.
Shriram Transport Finance
Shriram Transport Finance has been the market leader in commercial vehicles loans segment. The company’s focus on rural demand for used vehicles is expected to be the prime driver for growth for the company in the future. The shift from BSIV to BSVI should prove vital to the company as it would be increasing vehicle costs thus driving demand for the company’s core offerings of used vehicle loans. The management is quite optimistic of demand revival after the monsoons. It remains to be seen whether things will pan out as the management expects and how demand revives for the BS-IV vehicles before the impending BS-VI norms coming in at the end of the year. Nonetheless, given their strong rural network and their resilient performance in current tight liquidity conditions, Shriram Transport Finance is a stock to keep an eye out for anyone banking on the logistics and commercial vehicles space.
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