2 Small-Cap stocks that mutual funds are buying

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Srilata Rao
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2 Small-Cap stocks that mutual funds are buying

Post by Srilata Rao » Sun Sep 16, 2018 6:10 pm

Article By Rahul Oberoi, ETMarkets.com

Two smallcap outsourcing players from the consumer electrical and appliances (CEA) space — Dixon Technologies and Amber Enterprises — have been seeing a lot of interest from fund managers and brokerages in recent times.

Shares of Amber, listed in January 2018, are up over 13 per cent against an issue price of Rs 859, whereas those of Dixon Technologies, listed in September 2017, are trading nearly 55 per cent higher from the issue price of Rs 1,766.

In the case of these two stocks, more than 10 mutual fund houses have shown interest. They include top funds from Aditya Birla Sun Life AMC, ICICI Prudential AMC, Kotak Mahindra AMC, BOI AXA Investment Managers and HDFC AMC.

A super-bullish outlook for the consumer electrical appliances industry in India amid rising incomes and growing aspirations and fundamental strengths in these businesses appear to be the key draws for these investors.

Here are some of the key aspects about these businesses that could make an investor take a serious look in these stocks.

Industry prospects:-

1. India’s electronic manufacturing services (EMS) industry, which had a market size of around Rs 15,000 crore in FY16, is projected to grow at 30 per cent CAGR over FY16-21E, due to rapid demand expansion for consumer electronics and appliances, which had a market size of Rs 2,35,000 crore in FY16.

2. Favourable government policy (like ‘Make in India’ and M-SIPS schemes), India’s low-cost advantage over China (leading to a rise in domestic manufacturing and creation of large export opportunity) and better outsourcing strategy of consumer brands should drive this expansion. Penetration level in consumer electrical appliances is still low, and a rise in disposable incomes, an expanding middle class and easier credit availability should help faster growth.

3. The EMS industry is very much similar to the auto ancillary sector in terms of outsourcing models, rise in domestic manufacturing and a fall in imports. The industry is currently in the initial stages of auto ancillary growth. Auto ancillary stocks have delivered revenue, EBITDA and PAT growth at around 16-19 per cent CAGR over FY03-18, primarily on increased localisation, higher share of outsourcing and exports, and low-cost advantage. The market rewarded these financial performance with a 30 per cent market-cap expansion (CAGR) during the same period.

4. Elara Capital says Dixon and Amber will be the biggest beneficiaries of strong growth in the EMS industry.

Dixon Technologies:-

1. Dixon is market leader in outsourced manufacturing in washing machine, TV and the lighting segments. The company is projected post an EPS of 35 per cent CAGR over FY18-21E, driven by 19 per cent revenue growth CAGR and around 55 basis points margin expansion (ex mobile) on high operating leverage and backward integration.

2. Dixon has a healthy profitability matrix (FY18 ROE of around 24 per cent) largely due to its asset-light business model as evident by high fixed asset turnover (15x), negative net working capital turnover and cost efficiency due to scale and adoption of backward integration strategy. Besides, a low working capital cycle, disciplined capital investment with a payback period of 18 months and rising prominence of the ODM model makes Dixon an attractive play in an exciting EMS industry

3. It has reputed anchor clients and market leadership in categories such as LED televisions, lighting and washing machines. The company is preferred EMS partner for any OEM brand looking to enter or enhance its offerings in these categories.

4. Nirmal Bang Securities sees 23.40 per cent, 41.40 per cent and 29.20 per cent year-on-year PAT growth for Dixon Technologies in FY19, FY20 and FY21. RoCE is projected to grow 28 per cent, 31.70 per cent and 33.60 during the same period.

Amber Enterprises:-

1. Amber Enterprise is market leader of outsourced manufacturing in room ACs. It is projected to report 39 per cent EPS growth CAGR over FY18-21E, led by an 18 per cent (CAGR) revenue growth and a 65 basis points margin expansion by FY21E and lower interest expenses. For Amber Enterprises, working capital days increased to 53 in Q1 from 35 of Q4 due to large inventory.

2. Edelweiss Securities expects rising market share to drive 44 per cent earnings and 25 per cent EBIDTA growth (CAGR) for Amber Enterprises over FY18-21E.

3. Company’s strategic priorities over 2018-2020 include focus on achieving economies of scale, higher backward integration & in-house processing which shall accelerate profit growth, says Prabhudas Lilladher.

4. It components business, including both AC and non-AC components, contributed 28 per cent of FY18 revenues. The management has guided for 35 per cent increase in FY19 and eventually to 50 per cent in the coming years.

Pee Vee
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Re: 2 Small-Cap stocks that mutual funds are buying

Post by Pee Vee » Sun Sep 16, 2018 7:52 pm

LEEL Electricals is also a stock in the same sector as Dixon and Amber.

Porinju Veliyath is one of the major shareholders of LEEL.

It is presently available at rock-bottom valuations after having lost more than 50% of its valuation.

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