October 4, 2020

BEST SMALL CAP STOCKS TO INVEST IN 2020

By Roy

The search for the next multi-bagger, like Bajaj Finance, Avanti Feeds or Eicher Motors, brings us to the stock market. There are mature businesses like Reliance and TCS which are the kings in their own genre. Any investor who is looking for stable growth, a dependable business model and less risky bet, must opt for those mega-cap businesses. But with stable businesses, the growth becomes capped and as the saying goes, they are too fat an elephant to dance. In this post, we will shy away from those large cap stocks and concentrate on the best of small cap stocks to invest during the year 2020.

India has always been the stock-pickers’ market. Great businesses are available at throwaway prices which has huge upside potentials. My endeavour will be to bring those less-talked-about companies which have strong fundamentals, great promoters’ backing and sound business models. In this series, I will try to dig-out great small cap companies that have the potential to become the next multi-baggers. The first company in that list will be Sharda Cropchem Ltd.

Company Snapshot

* All Financial Figures as on FY20

Price Chart

Business Structure

Sharda Cropchem (SCC) is one of the fastest-growing agrochemical company. It is principally engaged in the export of agrochemicals (technical grade and formulations) and non-agro products such as conveyor belts, rubber belts/sheets, dyes and dye intermediates to various countries across the world.

Sharda Cropchem Limited is engaged in the marketing and distribution of a wide range of formulations and generic active ingredients, globally. They are an intellectual property (IP) driven company, with strong competencies in identifying opportunities in generic molecules and corresponding formulations, generic active ingredients, preparing dossiers, and seeking registrations in relevant jurisdictions.

Through their unique and agile asset-light business model, they have been able to spend most of their intellectual bandwidth on deepening the product portfolio and widening their geographic access along with maintaining overall cost competitiveness.

SCC generates about 85% of its topline from selling generic agrochemical products and balance 15% from the trading of conveyor belts and other non-agrochemicals. It operates in formulations and active ingredients solely based on generic (off-patent) molecules. This differentiates it from an innovator company that expends capital, time and resources primarily towards R&D.

Business Model of Sharda Cropchem Ltd

During the identification process, SCC weighs several factors including competition, margins, entry barriers, market size, ability to leverage it across jurisdictions globally, marketing and the time involved to seek registrations. It then procures formulations and generic active ingredients in the finished form from third-party manufacturers for onward sale. The company has formidable sourcing capabilities in China anchored by decade-old quality suppliers. It has ~50-60 consultants along with 18-20 employees across various geographies for product registrations.

The business in which ‘SCC’ operates, requires huge capital deployment and long gestation period to get the registrations and dossiers done. Time delay and funds tied for a long period makes this an unattractive opportunity for new generic agrochemical players. The capital investment required for registrations is usually Euro 3-5 million while the time required to receive one approval ranges from 3-5 years depending on the type of registration and the region in which it is applied for.

Revenue Break Up

All figures as on FY20All figures as on FY20

* LATAM – Latin America, ROW – Rest of the World, All figures as on FY20

New Registrations continue to be an engine of growth for the Company, as they focus on adding more registrations for strengthening our product offering to multiple geographies. The total number of registrations grew by 121 from 2,297 as of March 31, 2019, to 2,418 as of March 31, 2020. Moreover, they have another 1,038 registrations in the pipeline across geographies.

As on FY20, 2418 – Registrations, 80+ Countries, 400+ Employees

Company’s business model allows them to channel their time and resources efficiently towards developing the core competency of identifying generic molecules and registration opportunities. This enables them to offer a diversified range of formulations and generic active ingredients in the fungicide, herbicide and insecticide segments, protecting different kinds of crops as well as serve turf and speciality markets.

Creating a competitive edge, the business model facilitates achieving scale without having to invest proportionate capital. As a highly scalable business, they aim to generate exponential returns as they are not weighed down by the sales-cost growth relationship that exists in linear models. Contrastingly, as their sales increase, costs are expected to remain the same, allowing them to accumulate higher levels of profit over time.

The Management

Board of Directors:

  • Mr. Ramprakash V. Bubna: Chairman & Managing Director: Holds a Bachelor’s Degree of Technology in Chemical Engineering from IIT, Bombay. He has over 52 years of experience in chemicals, agrochemicals and related businesses. He is responsible for the Company’s overall business operations and strategy. Prior to joining the Company, he has been associated with Tata Oil Mills Limited, Zenith Limited, Piramal Rasayan Limited, Coromandel Fertilisers Limited and Zuari Argochemicals Limited. He is one of the Founders and Promoter of the Company.
  • Mrs. Sharda R. Bubna Whole-time Director
  • Mr. Ashish R. Bubna Whole-time Director
  • Mr. Manish R. Bubna Whole-time Director
  • Mr. M. S. Sundra Rajan Independent Director
  • Mr. Shitin Desai Independent Director
  • Mr. Shobhan Thakore Independent Director
  • Ms. Sonal Desai Independent Director

Company’s Financials

Profit and Loss Statement

Balance Sheet

Shareholding Structure

Financial Ratios

Compounded Sales Growth
10 Years: 19.00%
5 Years: 13.55%
3 Years: 12.70%
Compounded Profit Growth
10 Years: 21.48%
5 Years: 11.69%
3 Years: 1.59%

Verdict

  1. The Company has a business moat and a strong barrier to entry. For long-term growth, business moat is the most important factor.
  2. The Company has a unique business model which is asset-light. Hardly any expenses towards R&D. So, it is a very highly scalable business.
  3. The company has been aggressively filing registrations across geographies. The Company has an established track of securing registrations in the ‘toughest’ markets such as Europe.
  4. Promoters’ shareholding has increased in recent quarters.
  5. The worst is behind the company. I assume there is huge headroom for the company to grow and take market share.
  6. The company is trading at attractive valuations. With Rs. 2003 crore sales, company enjoying a market cap of Rs. 2300 crore. It showed approx 12% CAGR sales growth in last 3 years. It is an almost debt-free company. So, I can easily assume that the Sharda Chemcrop will double from here in the next 6-8 quarters.

 

Note – I am not a SEBI regd advisor. This post only for educational purpose. Kindly consult your financial advisor before investing.

Source – screener.in, annual report