This Niche Agrochem Smallcap is All Set for Rerating

I recently happened to take a shared cab to attend a family function.

The two fellow passengers I was sharing the cab with were having an interesting conversation about markets and economy. The analyst in me could not resist eavesdropping.

You see, it's interesting to speak to managements and get an idea about the future prospects of the business and developments in the industry.

But it's equally insightful to understand what goes on in the mind of a common investor.

After all, they have become a huge driving force for near term market movements. We know this from the number of demat accounts being opened in the last two years.

In fact, some shrewd big investors have made huge money by betting on, rather against, human behavior.

You see, human beings tend to think in groups and act with a herd mentality. This often leads to extremes in the markets that cannot be sustained.

For instance, in 1929, Joseph Kennedy, father of US President John F. Kennedy, made a bet on the end of the bull market when a shoeshine boy offered him stock market tip.

He shorted the market and made millions.

I won't have the chance to know what shoeshine boy thought about this. But I got enough of an idea about what retail investors are obsessed with from the conversation in the cab.

Their conversation hovered around economy, markets, stocks, EVs, Omicron, IPOs, bitcoin, NFTs, businesses like Zomato and Paytm, and so on. Basically, all the fancy terms that have been thrown at the common investor by the mainstream media.

They were trying to come to a consensus on where the best investment opportunity was. Both had very dismal view on FDs. They sounded excited about cryptos, new age economy stocks, upcoming IPOs.

On the former, I agree. While one should always have enough savings, fixed deposit returns will not help you make any substantial difference to your net worth. I would not be surprised if they fail to beat inflation.

However, the market optimism on everything fancy and new is a bit disconcerting.

Most investors, especially the new entrants, are leaning towards popular stocks, with least idea about fundamentals and concept of margin of safety in valuations.

Through this article, I hope to voice my views.

First, Cryptos...

I appreciate the concept of blockchain. I think it has great applications for businesses across industries.

However, cryptos are great only as speculative bets at this point in time. They should not be confused with investment bets.

This means you should bet on cryptos with only the amount you're ready to lose. If the crypto momentum sustains, this will allow you to win big with the downside of only affordable losses.

On IPOs...

As I have said before, it's good to see more and more companies, especially new age businesses getting listed.

However, when it comes to making recommendations, I see this more as a long term option than a profitable proposition at the current juncture. Most of the recent IPOs are untested business models. They have also been priced at exorbitant valuations.

I'm not comfortable paying so much for even well established companies and promoters with a track record. I don't think it will be prudent to compromise on margin of safety.

I recently recorded a video on how to pick an IPO winner.

That said, I do believe these businesses have led to huge investment opportunities in some lesser known companies. For instance, paper companies are getting a boost in packaging business due to surge in online shopping and delivery models.

It's too early to say which food delivery business will win. I have far more conviction on the business potential and valuations on the smallcap firms that a part of the ecosystem.

And these are the opportunities my team and I are assessing at present.

Don't get me wrong.

I'm very optimistic about the tech revolution. I believe some of the disruptive business models hold a great opportunity.

But I would rather wait to see how this companies perform on execution post listing. I would prefer to enter the stocks of the ones that do well and have the potential to generate sustainable profits, at reasonable valuations.

The keyword is 'sustainable'.

Unfortunately, for most new age companies touted as solid growth plays, consensus projections are more a case of building castles in the air, than a prudent estimate based on ground realities (competitive environment and economics of the model) and expertise.

So where should you invest?

That's a question my team and I work hard to find answers to.

Over last few years, most of the stocks we have selected and are nearing their horizon period have done well.

Apart from a conservative approach, the post Covid market rally, especially in smallcaps, has helped us.

But to be honest, the easy money has been made.

At elevated valuations and amid Omicron concerns, finding a stock that convinces both on fundamentals and valuations is getting challenging.

This is especially true for all the businesses and assets in space such as tech, EVs, internet businesses - that rank highest on the 'market sentiment' index.

That said, there are some 'boring' businesses where I see a good investing opportunity. For instance, yesterday, I released a recommendation on an agrochemical stock.

Now this industry is as boring as it gets.

But if you dive deeper, there is enough going on in the business to make it an exciting investing, over the next few years,

You see, this company operates in an 'essential' segment. That's a big comfort considering all we have gone through in the pandemic, and amid the Omicron scare.

It's a domestic market leader, with close to 20% share in a niche insecticide. It has a presence across the entire value chain - from intermediates to the final product.

The company has great growth opportunities from many molecules going off patent. It's well placed to capitalise on this opportunity.

It's fundamentals are strong too. The company enjoys healthy liquidity. Its balance sheet is almost debt free. And most of its capex will be funded internally.

What more, it's entering regulated markets in the developed world that offer not just growth potential but also better margins.

It's profits have grown over 40% CAGR, in last three years. It's future growth potential looks equally exciting.

And the best part? The stock is down over 20% from the peak in the last one year. The promoters have bought the stock from the open market at a price much higher than my recommendation price.

This suggests the management's confidence in the business prospects. As legendary investor and fund manager Peter Lynch has said:

• 'Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise'.

In short, the stock is a rare bet that makes the cut on both growth and margin of safety in valuations.

And if one gets in now, they would be getting a better bargain than the insiders.

Hidden Treasure subscribers can access the stock recommendation here.

Stay tuned for more such updates on my views and interesting investing opportunities in smallcaps.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure