India's Top 3 Smallcap Stocks

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The Most Fertile Ground to Find 100 Baggers

Aug 12, 2022

A few days ago, Zomato's stock crashed.

All the fancy narratives about new age business models, market leadership and so on, could not save this loss-making entity. Investors hurried to exit with the expiry of lock in period for shares.

With the moderation in market sentiments, the value of profitability and fundamentals in businesses is back, taking precedence over story telling.

When everything else suffers on the macro front, growth in profits, along with positive cash flows are comforting.

Today, I'm going to talk of a specific stock, which has done tremendously well on the profitability front.

Rajratan Wires, a stock we recommended in Hidden Treasure in November 2020, has been in news for being a 10 bagger in less than two years.

The stock has surged 15 times over this period. We could not enjoy the full ride as we exited early with attractive returns.

But that's a discussion for some other day.

Today, I want to talk about a specific push this stock, and many other stocks with a similar journey, have witnessed.

For one, this stock was not a glamorous business at all. In fact, it was in quite a boring business. It's the kind that was not popular in the post covid rally.

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The company is into tyre bead manufacturing - a very niche segment.

Its product is a drawn steel wire, used to hold the vehicle tyre on the rim. It is used in all kinds of tyres - two wheelers, passenger vehicles, commercial vehicles, earth moving equipment, and aircraft.

While this may not sound exciting by itself, the company's leading market share of over 50% in India, is exciting.

Think about it. It is critical to the smooth functioning of almost 50% vehicles on the road today.

While the product accounts for barely 2.5-3% of the tyre cost, it's a critical component. The vehicle's load is transferred from rim to the tyre, ensuring the safety, strength, and the durability of tyres.

70% of the demand of the tyre is driven by the replacement market, while the rest comes from the auto OEMs.

As such, the demand outlook for the company's products relies not just on capacity expansions by tyre manufacturers, but on replacement demand as well.

There's more. The company is the only bead wire manufacturer in Thailand (via a wholly owned subsidiary). It has witnessed a turnaround there.

The company has been undertaking huge capacity expansions to drive future growth. This is where we were expecting most of the returns in the stock to come from.

We were right... but only partially.

Like I said, while we closed the recommendation successfully, we missed the full rally.

In fact, for those who got into the stock six years ago, in June 2014, the stock has been a 140 bagger.

Much as the stock has gained from earnings expansion, it has also gained from PE (price to earning) expansion due to the entry of big investors.

From 2014 till date, the PE ratio of the stock expanded from 5 times to 72 times.

Apart from a very focused management and strong fundamentals, what helped the PE expansion is entry of big investors in the stock. The institutional stake in the stock has gone up from almost nil in September 2016 to 8% now.

Another point to note. The biggest share of gains in the stock have come in last 2 years. In fact, on a longer time frame, the rise is almost vertical on the chart.

Here's is how the stock of Rajratan Wires has performed over last 10 years.

Over this time, the country has seen demonetisation, the crash in smallcaps, IL&FS liquidity crisis, a pandemic, supply chain shortages, inflation, and even slowdown in the auto sector which is the prime industry the company caters to.

None of this has come in the way of the stock's performance.

That's the beauty of microcap stocks, patience, and power of long-term investing.

If this space interests you, do watch my video on profitable microcaps.

Warm regards,

Richa Agarwal
Editor and Research Analyst, Hidden Treasure

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