Start investing in super high quality small, midcaps: Sumit Bilgaiyan

The qualities one should look for in smallcaps/midcaps are no debt or low debt, non-pledged shares, good revenue growth track record, good quality management (no siphoning of funds from company), high barriers to entry, consistently high ROCE and ROE, Free cash flow generation in majority of the historical years," Sumit Bilgaiyan, Founder at Equity99 told Moneycontrol.

Edited excerpt:

Q: With more than 12 percent rally in 2 consecutive weeks, do you think all optimism related to re-opening of economy is discounted by the market?

Yes, I believe most of the optimism with economy opening seems to be priced in as the onground earnings continue to be weak and first half of FY21 results are also expected to be discouraging. Hence, the only reason for markets to rally is the opening up of economy.

Sumit Bilgaiyan

Founder|Equity99.com

• 'Do not expect markets to rally in June, revival package for most affected sectors likely'

• 'Focus more on essential goods & services companies, realty demand unlikely to revive soon'

• 'Stay away from financials amid NPA fears post-moratorium, SBI to remain under pressure'

Q: The rally seems to have also been backed by FIIs which bought nearly Rs 14,000 crore in the first week of June itself on top of same amount of buying in entire May. Do you think FIIs flow will continue going forward?

I believe this inflow is more temporary in nature as FIIs might be looking to buy super high quality largecaps for a long term investment, but still they are skeptical about India as a growing emerging market. Even if India gets downgraded to 'Junk' rating, the FIIs inflow will take a massive hit as they do not invest in such markets.

Q: Banking & financials were actual leaders of this two-week rally. Does it mean that all negatives related to NPA pressure have gone away?

The moratorium period has not yet got over, hence, the issue of NPA has not yet started. Also we are missing the point that a lot of businesses will continue to face weakness in the coming quarters which will lead them to bankruptcy and ultimately putting the pressure on Banking and NBFC industry. Some companies will surely be saved from becoming NPA due to easing of lockdown from June 2020, but I believe majority of the issues relating to NPA are yet to come.

Q: The Midcap and Smallcaps also participated in the run in equal proportion with benchmark indices. Does it mean that one should start nibbling in midcaps and smallcaps given the re-opening of economy?

Yes, I believe one should start investing money in super high quality smallcaps/midcaps, as rightly said, 'Bad time for the industry is good time for an investor'. The qualities one should look in these smallcaps/midcaps are no debt or low debt, non-pledged shares, good revenue growth track record, good quality management (no siphoning of funds from company), high barriers to entry, consistently high ROCE and ROE, Free cash flwo generation in majority of the historical years. The investment horizon should be minimum of 5 years, if the holding power is lower than that, then one should stay away from such stocks.

Q: What are key things to watch out for in the coming week which can give direction to the market?

The key things to watch out for will be the number of incremental cases of COVID-19 as many areas of the economy will open from June 8, 2020 and how the business activities are ramping up in the metro cities as they are the most affected. It will be important to track the new measures that Government will decide for July 2020 which might come in the last week of June 2020.

Q: What are your top five ideas which one should add it to his/her portfolio?

Kajaria Ceramics: Kajaria Ceramics is a market leader in tiles industry in India with a market share of 10 percent which the company expects to take it to 14 percent over the coming fiscals. The unorganised industry (55 percent) in Morbi is facing extreme pressures in the recent years like Demonetisation, GST, ban on coal gasifier and currently, anti-dumping duty from GCC on indian ceramics (40 percent of morbi exports), which will lead to much of the capacities to go out of system which will help the organised players to gain market share. Medium-term triggers include market share gains, government impetus to housing, product mix and widening distribution remain robust. Extended rains, subdued construction activities, liquidity crunch due to impact of COVID-19 could lead to weak earnings in FY21.

Alembic Pharma: Its US business could continue to surprise positively, and domestic revival is likely in FY21. Currently, the stock trades at 20x trailing EPS, and we believe that valuations are compelling with the domestic formulations business about to turn the corner.

Albert David: Albert David is a research-driven company in the field of manufacturing pharmaceutical formulations, infusion solutions, herbal dosage forms, bulk drugs and disposable syringes & needles. Its PAT has grown at 25.60 percent CAGR over the last 3 years. It paid 60 percent dividend for FY19 and paid 70 percent interim dividend for FY20. At the CMP of Rs 522, the stock trades at a P/E of just 10x. We are recommending a strong buy for medium to long term.

Talbros Automotive Components: Talbros Auto has around 40 percent market share in gaskets which is 3x against the nearest competitor. It is the market leader in two wheeler, agri & off loaders, HCV & LCV segment. TACL has an equity capital of just Rs 12.35 crore supported by reserves of Rs 184 crore. Promoters have increased their stake by 1.53 percent during July 2019 to March 2020. Its PAT has grown at 44.68 percent over the last 10 years. At the CMP of Rs 102, the stock trades at a P/E of just 7x. It is consistent dividend paying company since its inception. We are recommending a strong buy for medium to long term.

Gujarat Sidhee Cement: Gujarat Sidhee Cement (GSCL) is a Mehta group's flagship company. It markets cement under the brand name 'Sidhee'. Company has posted fantastic numbers for FY20. During FY20, it has reported operating profit of Rs 77.37 crore against loss of Rs 11.11 crore in FY19. It has reported PAT of Rs 44.84 crore against loss of Rs 5.87 crore. Company has paid 10 percent interim dividend for FY20 after 7 years. At the CMP of Rs 25.75, the stock trades at a P/E of just 5x. We are recommending a strong buy for medium to long term.