»Profit Hunter by Equitymaster

On This Day - 24 DECEMBER 2018
This Small Cap Stock Offers a Smooth Ride in a Rough Market...

Richa Agarwal, Research analyst

Small things can make a big difference. Ignore them, and they could be your biggest undoing.

Ask Fiat Chrysler, Toyota or General Motors.

One fine day, Fiat Chrysler had to recall 4.8 million vehicles to fix a defect that caused cruise control to remain engaged despite the use of brakes. Thankfully, there was only one incident reported and that too did not result in collision or injuries.

Yet, the company was quick to act. It warned the recalled vehicle owners not to use the cruise control feature until they had received a no-cost software update to fix the issue.

However, Toyota was not so lucky.

In 2009, claims were filed against the company that its vehicles suffered from 'unintended acceleration'. 6,200 complaints were filed, including 89 deaths and 57 injuries due to the issue.

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Toyota took its own time to respond. It initially blamed the floor mats slipping into the accelerator pedal, before admitting issues with the anti-lock braking system on a small number of cars. Globally, it had to recall nearly 9 million cars for such issues. Later, it was found that there was no electronic defect in Toyota. And that these incidents were due to driver errors and pedal misapplication.

A Stock that's a Smooth Ride on a Rough Road

But by then the damage was done. In fact, Toyota was doubly unlucky as its share price crashed 20% in a month and sales declined 20%.

GM too had to bear the brunt on its financials on account of a faulty ignition switch.

It's not just about the stock price correction or a financial hit. Such neglect of seemingly small details could cause severe reputation damage for automakers - dragging them years behind in a highly competitive industry.

OEMs (Original Equipment Manufacturers) realise this. And that's the reason they are so picky about every part that goes in the vehicle - big or small.

It is difficult to get their approval and meet their stringent quality issues while keeping the costs low for them. Few get this privilege. And the ones that do, normally end up being partners for life since entry barriers and switching costs are high in the industry... Unless the supplier goofs up on quality, or a competitor can match quality while offering better prices.

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My latest Hidden Treasure recommendation scores well both on quality and pricing.

The company is a market leader in the segment that it supplies to. Chances are high that any possible name in the auto sector you could think of would be its client.

What really impresses me about this firm is constant reinvention. From a single product single geography player, it has diversified across products and regions. It offers some interesting lessons on growth while derisking the business.

Amid the small cap correction, the stock is available at 35% discount to its 52-week high. In my view, at this price, it's great entry point and a good and stable bet for long term investors.

In these times, when small caps are out of favour, I believe some great opportunities are available at a bargain. Make sure to make the most of them.

Regards,

Richa Agarwal
Richa Agarwal (Research Analyst)
Editor, Hidden Treasure

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