COVER STORY

How
to be a
micr cap
master
A guide to spotting micro-cap winners

By Udhayaprakash, Hemkesh Khattar and Mithilesh Bhaumik

40 Wealth Insight April 2024

5
000-1 - Those were the odds Premier League trophy. They risks of investing in them.
of Leicester City Football outperformed giants like We also borrow the wisdom of Ian
Club winning the top flight Manchester City, a team whose Cassel, a leading micro-cap
of English football in the budget rivals that of a small investor, and provide a guide to
2014-15 season. The club had nation’s GDP. analysing micro-cap stocks.
narrowly avoided relegation the In the last 12 months, we have Our goal is to help you identify
previous year. In a bid to stabilise, seen many such underdog stories Leicester-like stories unfolding in
Claudio Ranieri, recently in the market. Specifically, 926 the market. But before we kick off,
dismissed as Greece’s national small businesses, known as micro know this: micro-cap investing is a
coach, was appointed manager. caps, eclipsed several market risky affair. While our framework
His recent firing hardly boosted giants and doubled in value. can help you make wiser decisions,
fans’ confidence. Yet, defying every This issue is all about micro there are no risk-free roads to
expectation, the club clinched the caps, including the benefits and micro-cap success.

Fortune favours the bold

Why investing in micro-cap stocks might be tempting

I
n 1996, Arsenal Football Club
was far from its glory days of Movement across various
the 1980s and in search of a market-cap categories
new direction. Despite Prepared for 15 10-year rolling periods starting
numerous high-profile candidates from Mar 2000-10 to Mar 2014-24
being in the mix, then-Vice Count (%) Average 10Y return (%)
Chairman David Dein made the Initial/Final Micro Small Mid Large
bold choice of appointing Arsène
55.7 8.0 0.2 –
Wenger, a Frenchman with no Micro
11.3 40.3 73.6 –
prior experience in English
football. Critics were sceptical as no 8.0 15.9 3.5 0.3
Small
foreign manager had previously -6.9 16.3 35.2 50.2
won the Premier League. The 0.2 1.7 2.8 1.5
media’s response was encapsulated Mid
-25.1 -2.3 15.5 27.7
in headlines like ‘Arsène Who?’
0 0.1 0.5 1.7
But Dein was firm that Wenger’s Large
revolutionary approach to football -36.5 -19.8 -0.9 14.8

and fitness would lead them to Count (%) represents the average percentage of
success. So, he took a risk that few companies moving from one market cap category
to another
were willing to take, and the rest,
as they say, was history. Wenger Illustrations: ANAND

guided the club to three Premier name suggests, are relatively small among any category. To put that
League titles, including a historic businesses and fraught with risks. into perspective, an investment of
unbeaten season, and revamped the But it offers fortunes to those who `1 lakh would compound to
club into a global powerhouse. dare. For instance, micro caps that `2.5 crore at this return rate!
The market, like the game of went on to become mid caps gave So, should you channel your
football, is also known to reward an average 10-year annualised inner David Dein and take a punt
risk-takers. Micro caps, as the return of 73.6 per cent, the highest on these stocks? The answer to that

April 2024 Wealth Insight 41

 COVER STORY

depends on your risk appetite. years, micro caps have secured a than not focus on a single business
We can, however, give you three 17 per cent annualised operating and sell fewer products, and thus,
reasons why micro caps entice even profit growth, higher than both are relatively easy to decipher.
the wiser investors: large and mid caps. The rewards of early discovery: Retail
Sky-high growth rates: You may have Simplicity: Are you comfortable investors must spot promising
heard the last stretch is always the investing in a business you do not businesses before the broader
toughest. This applies to fully comprehend? Most are not. market to reap the highest return.
businesses, too. Matured businesses Conglomerates especially are In other market cap categories, the
struggle to grow after reaching a infamous for leaving investors dizzy. odds are against retail investors, as
certain scale, as few growth Take Reliance Industries, for they have to compete with
avenues remain unexplored. Micro example. The conglomerate institutional investors. Micro caps,
caps, on the other hand, are encompasses a staggering 255 however, are a domain institutional
budding businesses. The legroom companies. The sheer scale alone is investors seldom traverse. So, the
for growth is immense, and hence, enough to deter any attempt to playing field is fairer, and the
these stocks usually exhibit analyse the company. Micro caps are return potential is higher.
exponential growth. In the past five the mirror opposite. They more often

Fortunes lost in pursuit

Why investing in micro caps often lead to losses
Worrisome micros
Companies with a market cap less than
`500 crore had more probability of losing money
Period % of companies with negative returns
FY14 46.1
FY15 30.4
FY16 42.9
FY17 29.0
FY18 26.8
FY19 32.8

D
avid Dein’s gamble on City. Echoing Wenger’s early FY20 66.7
Wenger underscores that critics, pundits predicted Bradley’s
FY21 47.9
going against the lack of Premier League experience
FY22 36.0
consensus has its rewards. would be his downfall.
However, consensus – whether in Unfortunately, unlike Wenger, FY23 37.3

football, the financial markets or Bradley’s efforts to defy these Average 39.6
life, often harbours kernels of truth. expectations fell short, resulting in Based on returns calculated on a five-year basis at
And not every challenge to the a tenure of just 85 days. the end of each financial year
status quo results in success. In the financial world, a similar
Consider the case of Bob narrative unfolds. Micro caps are
Bradley, who in 2016 became the deemed risky because they are. For An analysis of historical data
first American to manage a every tale of meteoric rise, there are reveals a telling trend: a significant
Premier League team, Swansea numerous others of decline and loss. portion of micro-cap investments

42 Wealth Insight April 2024

fail to yield positive returns. these obstacles. As a result, target for pump-and-dump
In our table titled ‘Worrisome numerous micro caps struggle to schemes and other price
Micros’, you can see that in every sustain themselves beyond the manipulation hacks.
period, at least one-fourth of the initial growth stage, especially Lack of information: Due to their
companies have led their investors when faced with competition from inherent obscurity, micro caps
to losses. larger corporations. lack readily available information,
Does this mean micro-cap Low liquidity: Unlike larger which can lead investors to make
investing is a fools’ gamble? No, companies, micro caps have less uninformed investment decisions.
but there are factors you should visibility and trade infrequently. So, how should one proceed?
consider before venturing into This results in fewer buyers and You can say you are risk-averse
micro caps. Here’s some of them. sellers, leading to volatile trading and deem micro caps as a no-go
Not all stand the test of time: Long- conditions; the six-month average zone. If so, we won’t convince you
term growth requires time and trading volumes for large, mid, otherwise. But for those who seek
resilience to navigate through small and micro caps are 52, 19, the fortunes micro caps have to
competition and economic 8 and 2 lakh, respectively. offer, we have crafted a trusty
challenges. However, many Prone to manipulation: Micro caps investment framework guided by
microcaps lack the necessary often receive negligible media the expertise of a seasoned
resources and expertise to endure coverage, making them an easy micro-cap mogul.

A FAIR methodology
The Ian Cassel way to select promising micro caps

F
– Find

I
t is hard not to mention Ian Cassel, however, has a time-tested
Cassel and micro-cap investing How do you find stocks that are solution: Brute force screening.
in the same breath. The inherently obscure? Sounds like Brute force is self-explanatory.
renowned investor has made a needle in a haystack problem. Ian You dive into the haystack head-on
the microcap world his home for and find the needle. Go through the
over 20 years. Perhaps his most micro-cap universe, one company at
lasting contribution is the founding a time. However, the vastness of the
of MicroCapClub in 2011, a micro-cap universe makes this
community where seasoned micro- method unfeasible. So, the trick is to
cap investors can share insights and first run a screener based on set
strategies. Yet, it’s his development criteria to reduce the ocean of stocks
of the FAIR methodology that stands to a pond. Then, apply brute force till
as his most seminal work, offering a you land on a potential investment.
robust framework for identifying However, innovation plays a
high-promise micro-cap investments. crucial role in making this strategy
To learn about this methodology effective. For instance, if you filter
from the master himself, visit: companies on generic criteria such
https://tinyurl.com/2dy7jdpz. as growth rates of 20 to 30 per cent
Given Cassel’s impressive and operating margins of around
contributions, we delved deeper and 20 per cent, you’re likely to end up
develop our interpretation of the with the same list as many other
FAIR methodology. Here’s our take. investors. This results in a low
probability of finding a company

April 2024 Wealth Insight 43

 COVER STORY

with promising potential at an z Robust execution: The particularly given the limited
attractive valuation – most will be management must be reliable with exposure micro caps have in
fairly valued or overvalued. The key a record of executing its mainstream media. This stage
to staying ahead is to innovate by plans successfully. involves direct engagement with
employing a more nuanced filter z Strong leadership: In a small the company’s management,
that not only identifies companies company, the quality of leadership suppliers and customers to verify
that are currently performing well can be a make-or-break factor. The the authenticity of its public
but also those with the potential for leadership must be invested in the disclosures and the viability of its
future success. This approach business. Cassel says, “I never business model. For retail
enables you to discover potential want to invest in a business whose investors, such an extensive
investments at attractive valuations, management doesn’t have to network might be out of reach,
giving you a competitive edge. live with the consequences of underscoring the value of

A
their decisions.” communities like the
– Analyse MicroCapClub. Hence, building a
Analyse the company before community of investors with
investing in it. While it may Cassel’s FAIR methodology shared interests provides a
sound obvious, note that analysing Find significant competitive advantage
micro caps is no walk in the park. z Screen for future winners in micro-cap investing.
z Go through companies one at a time

R
A simple Google search will not
help. You will not find information Analyse – Research
in any weekly newsletter. The only z Read everything the company releases Micro caps inherently are
way out is to go old school. You z Watch out for red flags nascent businesses. Over the
must dive into every bit of public z Look for a track record of good years, as the company evolves, it is
execution
disclosure available. possible that the factors you based
Now, the question is how to fast- Interact your investment case on are rendered
z Analyse whether customers and
track the process. For that, Ian mute. This dynamic nature of micro
employees are happy
Cassel suggests arriving at a ‘no’ as z This is where you can develop an edge caps necessitates a continuous
quickly as possible. For example, if re-evaluation of investment choices.
Research
you spot a company with a history of z Evaluate your original thesis periodically Hence, Cassel advises investors to
financial fraud, you may put that z Over the long term, key variables change conduct maintenance due diligence
company to bed and move on. periodically. These should include
Here’s a checklist you can use to revisiting the points that made you
reject companies. If any company z Healthy balance sheet: Without initially select the company and
has these traits, you should tread adequate cash and consistent profits, staying in touch with the
with caution: no business can survive in the long management or experts you may
z No revenue, no cash-flow term. Ensure that the company has have consulted in your initial
conversion, etc. remained profitable and does not analysis of the stock. Maintaining
z Past frauds have a history of overtly relying these qualitative relationships
z Significant related-party on debt. is crucial to the maintenance
transactions unrelated to z Healthy culture and customer due diligence.
the business relationship: Cassel believes a healthy Ian Cassel’s FAIR framework has
z Shady auditors work culture and strong customer guided several micro-cap enthusiasts
z Messy capital structure relationships are the two most to success. The sheer popularity of
Once you eliminate the red flags, rewarding assets of a company. his MircoCapClub underscores that
you must check if the remaining However, these factors are difficult his investment philosophy is
companies possess the key to assess and require groundwork. replicable and rewarding. So, are

I
ingredients for growth. These you ready to brute force a screener
ingredients may vary across sectors – Interact through the micro-cap universe?
and businesses. However, here’s a Interaction is a critical step in Our Ian Cassel-inspired screener
broad checklist you can use: the FAIR methodology, might just help you with that.

44 Wealth Insight April 2024

Our methodology
A robust framework to pick high-quality micro caps
z Five-year cumulative CFO-to-

W
isdom is hard to narrowed it down to 59 companies.
quantify. Is it possible EBITDA of at least 65 per cent. To identify the top candidates, we
to replicate Warren z Profitable and positive CFO further applied two qualitative
Buffett’s uncanny in at least four out of the last filters: a) A growing industry and
stock-picking abilities through five years. b) relatively detailed disclosures.
some quantitative filters? The z Five-year median ROCE of at The latter ensured that our final
straightforward answer is no. least 10 per cent. list had companies that an average
But there is always room for z Five-year annual growth investor could analyse. Our final
inspiration, meaning we can in revenue, operating profit list, after applying these two
incorporate some qualities of and profit after tax of at least filters, had 10 stocks.
popular investors into our own 10 per cent. We adjusted profit To validate our quantitative
strategies for selecting stocks. after tax for exceptional items. methodology, we compared the
So, inspired by Ian Cassel’s z Debt-to-equity ratio of 1.5 times performance of these stocks
FAIR style of investing, we made a or lower to avoid companies with against the BSE SmallCap index
methodology to pick promising highly leveraged balance sheets. across five periods. Our selected
micro caps. Note that no method z Promoters’ stake of at least stocks outperformed the index in
can guarantee success, especially 30 per cent. This ensures that the four out of these five periods! Even
when dealing with micro caps. owners have skin in the game. in the period it lagged the index, it
However, our approach will set z Institutional stake of at most gave eye-popping returns.
you on the right path. 5 per cent, a trademark of So, let’s dive deep into these
Here are the filters that define relatively obscure stocks. 10 promising micro caps and
our methodology: Initially, 718 companies met our understand their businesses.
z Market cap between `200 crore market capitalisation criteria. Note that these are not our
to `1,000 crore. After applying all filters, we stock recommendations.

FAIR vs BSE SmallCap Micro caps with mega potential

The performance of our methodology against 10 promising micro caps that meet our selection criteria
the benchmark
Five-year growth (% pa)
Our methodology BSE SmallCap Market cap Profit 5-year avg.
Company (` cr) Stock Rating Revenue after tax ROCE (%) P/E
30% per annum
Titan Bio-Tech 468  20.2 57.8 27.4 18.9
25 Prevest Denpro 468 Unrated 24.0 48.6 39.6 28.3
Sarthak Metals 341  19.0 44.3 18.3 18.5
20
Bajaj Steel Industries 618  16.6 41.2 24.6 11.5
15 Mallcom (India) 588  10.9 34.3 20.7 17.1
Emami Paper Mills 792  11.2 33.4 10.5 17.3
10
Dynamic Cables 934  13.4 33.1 21.3 27.5
5 D.P. Wires 845  42.3 33.0 28.9 20.3
Sukhjit Starch & Chemicals 734  15.6 22.8 15.5 13.9
0
2015-20 2016-21 2017-22 2018-23 2019-24 Infobeans Technologies 989  32.2 16.5 21.6 55.0

Recent returns as of February 29, 2024 Price data and Stock Rating as of February 29, 2024. Profit after tax is adjusted for exceptional items.

April 2024 Wealth Insight 45

 COVER STORY
TITAN BIO-TECH

The ubiquitous microcap

Profit after tax

T
itan Biotech plays an market remains its primary
indispensable role in the daily breadwinner, with 69 per cent of
lives of millions in India. It is 4 the revenue originating from
25
one of the leading Indian domestic operations.
manufacturers of biological Looking ahead, peptone is
products used in a diverse array of poised to remain a key growth
industries, including TTM Dec 2018 TTM Dec 2023 driver. According to its annual
pharmaceuticals, nutraceuticals, report, the peptone market is
food & beverages and cosmetics. Its primary growth target starting anticipated to expand by
biggest competitive advantage is its FY21. The revenue contribution 12 per cent annually until 2030.
expertise in manufacturing peptone from peptone grew to 54 per cent in Nevertheless, the company faces
(used in the production of enzymes, FY23 from 25 per cent in FY21. challenges, notably its lengthy
vaccines, antibiotics and more) and Simultaneously, contributions cash conversion cycle of 128 days.
microbiological culture media (used from chemical products shrank to In addition, its valuation is
in pharma, food & beverages). 24 per cent from 57 per cent. It also expensive. It trades at a P/E of
Peptone, especially, has been a garnered several global clients, 19 times, more than twice its
game-changer for the company. and revenue from exports has five-year median P/E.
The company spotted the potential compounded 21 per cent annually
of this bioproduct and made it its since FY21. However, the domestic

PREVEST DENPRO

Global bite of success

Profit after tax

Y
ou don’t have to be a large forayed into the lucrative US and
cap to be a global leader. Canada markets and expanded its
Prevest Denpro is one of the 16 capacity to cater to the additional
world’s largest dental materials demand. Second, the extra capacity
3
manufacturers, with a portfolio has enabled Prevest Denpro to
encompassing adhesives, broaden its product portfolio and
composites, cement, liners, FY19 TTM Dec 2023 manufacture oral hygiene and oral
endodontics, orthodontics care products.
and more. R&D facility in India. In addition, But no micro cap is without
It established its global it is the first Indian dental risks, and Prevest Denpro is no
dominance by focusing on product manufacturer to get ISO exception. The dental material
portfolio and quality. The company certification and has also received industry is highly competitive.
caters to every dental product a approvals from the Saudi and US In addition, it draws 60 per cent of
dentist may require through its FDA. It has also partnered with its revenue (FY23) from exports
diverse product offerings. Also, its 12 dental universities. and has to compete with global
focus on R&D has helped it ensure The management expects giants. Moreover, the US and
quality and compete with larger incremental growth in the coming Canada, geographies it deems as
players. Notably, Prevest Denpro years based on two major key growth drivers, are teeming
was the first company to set up an developments: First, it has recently with large players.

46 Wealth Insight April 2024

SARTHAK METALS

Forging high-quality growth

A
part of the Desraj Bansal Profit after tax 18 after tax in the 12 months ending
Group, Sarthak Metals December 2023.
manufactures metal-cored 6 In the coming years, the
wires and aluminium flipping management expects new product
coils. Its products play a crucial launches to spur a recovery. It
role in molten steel processing, recently introduced a new product
facilitating impurity removal and FY19 TTM Dec 2023 in the form of flux-cored wires, a
the production of high-quality product largely imported from
steel. With established 50 per cent in FY23. While the China. Moreover, the reversal of
partnerships with key steel majority of its revenue (83 per cent the trend of rising steel exports
manufacturers such as Tata Steel, in FY23) comes from the domestic from China is expected to benefit
JSW Steel and SAIL, market, its products are primarily Sarthak Metals.
Sarthak Metals enjoys a utilised in Indian steel exported Nevertheless, the company’s
competitive advantage. globally. However, the increase in venture into biotechnology, despite
The surge in post-COVID steel steel exports from China has lacking expertise, raises concerns.
demand has driven significant adversely affected global demand It also carries valuation concerns.
revenue growth in recent years. for Indian steel, resulting in a It presently trades at a P/E of
To capitalise on this trend, the 34 per cent YoY revenue decrease 19 times, more than twice its five-
company expanded its capacity by and a 43 per cent decline in profit year median P/E.

BAJAJ STEEL INDUSTRIES

Threading a success story

E
stablished in 1961, Bajaj Steel Profit after tax 54 of Research on Cotton Technology.
Industries stands as India’s Rising global cotton production,
leading manufacturer of 16 geographical expansion and
cotton ginning machines. The strategic focus on R&D should help
company boasts a commanding the company grow in the long run.
market share of 66 per cent. These However, its reliance on cotton
machines are essential for TTM Dec 2018 TTM Dec 2023 sowing exposes it to environmental
separating the fibre from seeds and threats. Moreover, its significant
cleaning cotton. Additionally, the and saw gin. Furthermore, strategic dependence on exports raises
company produces electrical panels, collaborations with US-based concerns. For instance, in FY22,
fire-fighting equipment and pre- Continental Eagle Corporation have despite a robust 26 per cent growth
engineered buildings. enabled the manufacturing of in domestic operations, revenue
The company’s dominance in the advanced ginning machines for experienced a worrying 14 per cent
market can be attributed to its export markets, resulting in a YoY decline due to COVID-related
robust in-house R&D capabilities. remarkable 29 per cent annual lockdowns in key export
Bajaj Steel Industries is the sole growth in export revenue since destinations. Additionally, the
global manufacturer offering all FY18. To fortify its domestic company is aggressively expanding
four types of ginning machines: presence, the company has into several sectors. This may pose
single roller, double roller, rotobar partnered with the Central Institute the risk of over-diversification.

April 2024 Wealth Insight 47

 COVER STORY
MALLCOM (INDIA)

Profiting off protection

M
allcom India started its Profit after tax 34 the competitive advantage of large
journey as a leather glove scale manufacturing. Mallcom
manufacturer in 1983. India faced market share losses
13
Over the years, it became India’s this financial year due to intense
largest producer and exporter of competition and supply
personal protective equipment chain issues.
(PPE). With 13 manufacturing TTM Dec 2018 TTM Dec 2023 Its capacity expansion plans in
facilities across India, it serves Kolkata and Gujarat could
over 50 countries. In the nine strong client relationships as the strengthen its market position.
months ending December 2023, top 10 customers accounted for The additional capacity is expected
exports made up 56 per cent of its 40 per cent of its revenue in FY23. to be operational in Q1 FY25. The
revenue, and Europe emerged as Besides, it generates over management is aiming to hit a
its primary export destination. 80 per cent of its revenue from revenue of `1,000 crore in the next
While Mallcom India has led the repeat customers. five years.
PPE industry for nearly a decade, However, competition from Will it be able to achieve its
COVID-19 was a turning point for China, which holds an 80 per cent goals and leave the Chinese
the company. Unprecedented rise share of the global PPE market, competition in dust? That is a
in PPE demand catapulted the poses a significant threat. Further, question that only time
company to new heights. It boasts the Chinese counterparts also have can answer.

EMAMI PAPER MILLS

Growth in the news

I
f you have ever read a Profit after tax competitive challenges.
newspaper, you have held a This shrank its market share in
product of Emami Paper Mill. 51 the region, and its revenue from
46
A part of the Emami Group, exports fell 54 per cent in FY23.
Emami Paper Mills has been the In the current financial year, raw
largest manufacturer of newsprint material prices have cooled down.
in India since 2008. Its major TTM Dec 2018 TTM Dec 2023 However, the competitive intensity
revenue contributor, however, is has remained at similar levels.
the paperboard segment. 3.4 lakh tonnes in FY22. Moreover, Consequently, its earnings have
It operates two manufacturing the ban on single-use plastic by the remained muted.
plants in India. Also, to meet its government in 2021 led soaring Despite these challenges, the
power requirements, it owns one demand for paper. Consequently, management team at Emami
thermal power plant. profit after tax jumped almost Paper Mills remains optimistic
Its expertise and market 10 times! about the future. They are
dominance in newsprint has However, it witnessed a particularly hopeful about the
helped it stay ahead of the herd. In significant uptick in raw material potential of the paperboard and
the past five years, it has been on a prices in FY23. In addition, stationery segment to drive the
roll. Production capacity increased increased Chinese exports in company’s recovery and fuel
from 1.8 lakh tonnes in FY18 to South-East Asian markets led to future growth.

48 Wealth Insight April 2024

DYNAMIC CABLES

Compounding on cables
B
oasting an experience of Profit after tax 34 from 0.5 in March 2023 to 0.04 in
over 35 years, Dynamic 21 September 2023. It also trades at
Cables manufactures an expensive valuation. with a
conductors and cables. Its primary P/E of 28 times, around 2.7 times
breadwinner is low-tension cables, the five-year median.
accounting for around 91 per cent However, the cable segment is
of its revenue (FY23). It boasts a FY19 TTM Dec 2023 marked by intense competition.
high-profile clientele, including In addition, the segment suffers
BHEL, Tata Power, Siemens, etc. zoomed to 8.2 per cent from from volatile raw material costs
Dynamic Cables’ strategic 4.9 per cent during the and demand. Moreover, a
decision to shift its focus from same period. significant amount of business
conductors to the high-margin The management is confident originates from the government,
cable segment helped it compound that rising capex from the public which may pose a threat.
its topline in recent years; the and private sectors will drive Apart from the structural
revenue share of the conductor growth in the coming years. issues, high trade receivables are
business has declined to around It boasts an impressive order book also a concern for the company.
4 per cent in FY23 from of `521 crore as of December 2023. Debtors as a percentage of
38 per cent in FY18. Concurrently, In addition, it has successfully revenue has remained above
its operating profit margin has reduced its debt-to-equity ratio 25 per cent since FY16.

D.P. WIRES

Wired for growth

H
ave you ever heard of Profit after tax threats to D.P. Wires.
LRPC? It stands for low 42 Another concern in recent years
resistance pre-stressed 17 has been shrinking margins. In
concrete steel and is used for FY23, the operating margin fell 200
improving the structural integrity basis points as it witnessed
of buildings. D.P. Wires’ expertise considerable growth in the steel
lies in manufacturing LRPC. FY19 TTM Dec 2023 wire rod trading division.
In addition, it sells plastic products However, revenue jumped
and has a power division. recent years. Since FY20, its sevenfold, buoyed by this growth.
Its scale and manufacturing volumes have grown But, the management is
expertise helped D.P. Wires 25 per cent annually, and total optimistic about the upcoming
become the authorised stranded capacity has almost doubled. years. Rising demand and capacity
wire supplier for several Notably, there are only three expansion should work in its
government organisations and the players in the stranded wire favour. But the cyclical nature of
sole supplier for metro rail segment: D.P. Wires, Tata Steel demand in this segment presents a
projects. The rising adoption of and Usha Martin. Among the potential risk. The company’s
LRPC in commercial and three, Tata Steel and Usha Martin ability to navigate through
residential buildings has helped are significantly larger in scale potential downturns will decide its
the company scale new heights in and, hence, pose competitive fate in this competitive market.

April 2024 Wealth Insight 49

 COVER STORY
SUKHJIT STARCH & CHEMICALS

Carving out a starchy niche

S
ukhjit Starch and Chemicals is Profit after tax 53 capacity expansion in the next
India’s third-largest producer 24 months, the first phase of which
of starch. It operates four 28 will be operational by Q1 FY25.
manufacturing facilities, producing However, a volatility in maize
various kinds of starch with prices, a critical raw material,
applications across multiple impacted margins in FY23; the
industries, including paper, food TTM Dec 2018 TTM Dec 2023 operating profit margin shrank by
additives, pharmaceuticals, paints, three percentage points despite the
etc. The company boasts a diverse growth in the past few years. company securing a record-high
clientele encompassing prominent In addition, it undertook topline. In addition to its margin
names such as Dabur, Nestle, considerable capacity expansion to woes, there exist structural
Abbott and more. capitalise on the trend. Its revenue concerns. The company is a B2B
Akin to several companies in our has more than doubled in the past firm, meaning demand is tied to the
list, Sukhjit Starch and Chemical five years. Its profitability also performance of the end product
has the advantage of being a improved concurrently, allowing it produced by its clients. Hence, any
dominant player in a segment with to deleverage. It reduced its debt-to- slowdown in the FMCG or pharma
few organised players. Riding on equity to 0.21 (as of September 2023) sectors may have a considerable
the rising demand for starch, the from 0.91 in FY21. The management impact on its financials.
company witnessed significant also plans an additional 25 per cent

INFOBEANS TECHNOLOGY

Working for cloud titans

I
nfobeans Technologies is part Profit after tax percentage points. The trend has
of the competitive landscape in persisted in the current financial
the Indian IT industry. year. In addition, headwinds in
It provides cloud-computing 20 the form of a slowdown in IT
18
services to over 180 clients, expenditure in the US and Europe
including 15 Fortune 500 have added to its woes. In the nine
companies. Like most in the TTM Dec 2018 TTM Dec 2023 months ending December 2023, its
industry, the US is its primary net profit margin declined to
revenue source. In the past nine revenue growth. It grew a single digits. Its valuations are
months, it has accounted for whopping 32 per cent annually, also expensive. Currently, the
70 per cent of the total revenue, from `95 crore in FY18 to company trades at a P/E of
followed by Europe at 16 per cent `385 crore in FY23. 55 times, around 2.5 times its
and Asia at 14 per cent. However, this aggressive five-year median P/E.
Infobeans’ competitive edge approach has put pressure on its The management, however, is
comes from its high-profile profitability. Employee expenses confident of a recovery. It recently
clientele, namely Salesforce, also soared nearly 72 per cent partnered with a German cloud-
Microsoft and ServiceNow. annually between FY18-23. computing company and plans to
Its capture-revenue-first strategy Simultaneously, the operating expand in the US and Europe
has helped it clock exponential profit margin shrank by seven through five acquisitions.

50 Wealth Insight April 2024