Ever since Modi announced demonetisation, there has been an interesting debate on how it will impact economy. And whether it will be able to curb the black money.
The view still remains divided. Only time will tell how the move affects economy and different industries.
In the short term, commerce has come to a halt. Rural economy has taken a severe hit. And stock markets have not yet taken a breather. The BSE-Sensex is down 5.5%. But it is the BSE-Small cap index that has taken the worst hit. The value erosion in last two weeks has been 11%. Over 150 stocks have lost around one-fifth of their value.
Some of the stocks under our coverage have witnessed price erosion as well, leading to buying opportunity in the stocks where earnings visibility remains strong despite what has happened over last fortnight. Mold-Tek Packaging Ltd is one such stock.
With 20% market share, the company is one of the leaders in the rigid plastic packaging in India. Asian Paints, Castrol, Berger Paints, Kansai Nerolac, Akzo Nobel, Bharat Shell, Amul, Vadilal, Kwality, Unilever, Cadbury, Adani Wilmar, ConAgra, Cargill, and Healthy Heart are some of its clients. In fact, the company boasts of being the largest supplier to some of them.
The company has been consistently growing at a healthy rate and the growth prospects in the coming years also remain strong. RAK facility, food/FMCG segment and shift to IML will be growth drivers in the next few years. From FY 20 onwards, significant growth could come from new facilities that will be established to cater to Asian Paints (starting with 6500 tons capacity). While initial capacity utilization will remain low at RAK facility, it is expected to grow in the future. The management has given an overall volume growth guidance of 15 to 20 % in the coming years.
As per the management, the share of IML may grow from 43%-44% in FY 16 to 46% in FY17 and could cross 50% in FY 18.
Further, the company is also exploring other opportunities in the food/ FMCG segment and is getting inquiries from some of the well established companies in the segment. The management expects contribution (to sales) from this segment to grow.
The management expects to close FY17 at EBIDTA of Rs 28.5 to 29 per kg (versus 27.5 Rs per kg). The capital expenditure in FY17 is expected at Rs 300 m, of which Rs 150 m has already been incurred. Management expects internal accrual to meet capex needs. If at all required, it will go for loans without straining balance sheet. For Asian Paints' new facilities, expected capex in future is 38 to 40 crore. Dividend for FY 17 is likely to be in the range of Rs 100 to Rs 120 m.
Recently, we had revised the target price of the stock to Rs 290. The stock has corrected by around 15% in the last two weeks. At the current price of Rs 190, it is trading at 19 times its trailing twelve months earnings and 11 times the forecasted earnings in FY20. Given the strong fundamentals, visibility in growth and competent management and upside after the recent correction, we change our view from Hold to Buy. The maximum buy price for is Rs 210. According to us, small cap stocks should comprise of not more than 10% of one's total equity portfolio. Further, we believe that a single small cap stock should not form more than 2-3% of the total portfolio. Please note that this allocation will vary from person to person. For something that works best for you, we recommend you talk to your investment advisor.
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