The Shift in Global Supply Chains Could Unlock Huge Opportunities in These Three Smallcaps 

Dear Viewers

In today's video, I'm going to talk of a huge structural shift unfolding in India, and the companies that stand to benefit from it.

A few months ago, I was approached by a financial journal to share my views on crude prices in the future, and about where I see the investing opportunities considering the high crude prices.

I shared the comment. This was with full disclosure that I have no clue about oil prices, where they will be a few days, weeks, or a few months from now. I had no stock names to offer based on oil prices. I do not believe is a reliable reason to pick stocks.

As I write this, the oil prices have hit seven-month lows. It has taken down with it the valuations of potential beneficiaries - the upstream oil companies.

In contrast, the marketcap of BSE listed firms is touching all-time highs. The Sensex has gained 16% from June 2022 lows. The smallcap index is up 26%.

The FIIs are back. The amount they have invested in August alone is over Rs 500 bn. The concerns about Fed interest rate hikes have moderated. Corporate profits are on the road to recovery with inflationary pressures easing.

Indeed, there has been a rebound in stock prices that no one was anticipating.

On the other hand, the entire narrative about commodity super cycle has lost relevance as prices of steel, oil, and other commodities has cooled down.

The SPAC proponents have disappeared from the twitter. And so have their followers.

The crypto experts and young millennials whose financial investment journeys started with dogecoin are learning new lessons.

And yet, little has been learnt.

Unfortunately, a lot of print space and prime time is wasted on predicting macros and cycles and taking cues from it to pick stocks. This is a highly complicated exercise that no one has been consistently good at.

This reminds me of the famous saying by John Kenneth Galbraith

• 'There are two kinds of forecasters: those who don't know, and those who don't know they don't know.'

Instead, if we spent the same amount of time, energy and effort in spotting structural shifts in the economy, industries, and companies they could benefit, we believe we would be a lot better off in terms of investment returns.

Today, I am going to talk about one such structural shift, that could create huge wealth for companies in India.

I'm speaking of the shifting supply chains, the diversion of trade from other economies to India, in the post pandemic era, and the beneficiaries of the same.

These shifts were always happening but at a much gradual place. They have picked up pace for three key reasons.

What has happened amid Covid is global economies with over reliance on one supplier, specifically China, saw their supply chains breaking, and their prospects dwindling.

With this shake up, the corporates consciously decided to diversify and broaden the outsourcing. In fact, not just corporates, even the global economies are coming up regulations that discourage dumping from China.

India has been a key beneficiary of this. A case in point is textile industry where many players like Trident and Arvind are benefitting. India's share of exports to the US in apparels has increased compared to other countries from 28% to 36% YTD CY 2022.

Second factor is Indian government's thrust on Make in India. The government is coming up with policies that are protectionist in nature.

These include imposing anti-dumping duties on flat rolled products of aluminium, sodium hydrosulphite (used in dye making), silicone sealant (used in manufacturing of solar photovoltaic modules, and thermal power applications), hydrofluorocarbon (HFC) components used in refrigeration industry, rubber chemicals, APIs such as ofloxacin and so on.

Companies such as Nocil, NALCO, and Aarti Drugs have gained on these developments.

Then there is thrust on more share of domestic in manufacturing sector. PLI schemes that offer support on capital investments and subsidies are a way to achieve this. Electronics sectors and companies like Dixon will benefit from the same.

Another case in point is the defense sector that is undergoing indigenisation, or use of domestic components in defense manufacturing.

This would be positive for companies in the defense sector such as Hindustan Aeronautics, Garden Reach Shipbuilders, Avantel, Data Patterns, and Bharat Electronics.

Of more than 10,000 items that were earlier imported have been laid on a portal for indigenisation. Of these, interest has been shown for over 2,800 components. With events such as Russia Ukraine war and India's own tensions with its neighbours like China, this trend is set to gain momentum.

Third is factors intrinsic to China. Stringent norms related to environment, hike in wages, cutdown in subsidies and shut down of cities and curtailment at the key ports amid a recent lockdown and zero tolerance policy towards Covid has led to destabilised supply chains.

In a crux, a huge opportunity is unfolding for certain industries and specific companies based in India.

Let's now move on to specific companies that are witnessing tailwinds from this phenomenon:

The first is a smallcap company - Gokaldas Exports. The company is into designing, manufacturing and sale of a wide range of garments for leading international fashion brands and retailers in over 50 countries, with clients like GAP, Walmart, JCPenney, Adidas, H&M, Mark Spencer, Puma, Old Navy.

The company has seen an increase in the wallet share from its top 3 clients. For new initiatives, capacity expansions, and plant upgradation, the capex envisaged is Rs 3.7 bn.

The stock is down 30% from its 52 week high, available at a PE of 14 times. Its net debt is negative and has cash and cash equivalents of Rs 2.4 bn, almost 11% of marketcap. And return on equity and capital employed are 23% and 18% respectively. The cash flow from operations are positive.

The management expects the business to benefit from continuing shift of global sourcing away from China, supplier consolidation towards efficient and well -capitalised players, supply side instabilities in countries like Sri Lanka, Pakistan and Burma, favourable currency, announcement of PLI, and signing of free trade agreements with key markets.

The second stock on this list is Maharashtra Seamless.

The company enjoys an almost 55% share in seamless pipes that are primarily used in oil and gas industry, along with ERW pipes used in city gas distribution, sewage, and housing projects.

Under atmanirbhar drive, any purchases made by PSUs, that also happen to be key clients for the company, have to have a minimum of 35% value addition by domestic platers in the supply of pipes. In fact, for tenders up to Rs 2 bn, only domestic tenders will be floated.

Under another protectionist measure, anti=dumping duty has been imposed on imports of seamless pipes from China for the next 5 years. China itself has removed a rebate of 13% for exports for its manufacturers.

Not just domestically, the company's products are witnessing strong demand from export markets like US and Europe, as India fills the gap amid sanctions on Russia and absence of Ukrainian suppliers in the market.

The stock is available at a PE of 13 times, and with a return on capital of 13%. The debt to equity stands at 0.2 times. The insiders have increased stake in June quarter. And the management commentary on growth guidance is strong.

The third stock is Shaily Engineering Plastics. The company makes and sells injection moulded precision plastic components used in home furnishing, auto sector, medical sector, and other industries.

In the recent years, it has ventured into toy manufacturing. Earlier, China used to be the manufacturing hub for global manufacturing company. However, the hunt for an alternative supplier has opened doors for a new business opportunity for the company.

In the initial years itself, Shaily is working with global giants like Spin Master and Hasbro. The other factor that are expected to drive the business significantly is increasing revenues from medical devices, such as pen injectors that have high margin.

The stock has a ROCE of 14%. The debt to equity is well below one. The stock is trading at a PE of 54 times.

Do keep in mind that the inclusion in this list does not imply a buy view. I would recommend you to do due diligence at your level.

So these were just a few examples that I believe have received less limelight than others. However, the opportunity is huge and there would be many beneficiaries across industries, that could gain from this tailwind.

I would strongly recommend to watch out for the same and pick the potential beneficiaries with enough margin of safety in valuations.

With this, I have come to the end of the video.

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Goodbye and have a good day.