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This is the sixth post in our quarterly update series for Q1 FY20.

In this post, we’re sharing the latest updates of the stocks from our watchlist. Please don’t treat this as a buy recommendation. We find these businesses interesting and we may build position (or buy more of those that are already in our portfolio) in them in the future. The purpose of this post is to bring clarity in our understanding of the businesses we are tracking.  We make our notes on the quarterly results and conference calls. Putting it up here makes it easier for us to refer them at a future date.

You can see the earlier updates here.

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Please click on the read more button for more details on each stock.

Allcargo Logistics

Allcargo finds its place in among the top 10 shipping and logistics companies in the world. They have achieved impressive growth in the current quarter despite the global headwinds of trade tariffs and restrictions. The company is looking forward to developing its logistics park division which would enable them to start operating end to end logistics services to any and every type of customer. It remains to be seen how long the company shall be able to outperform the industry and whether the industry will be able to pick up from current growth levels of 2-3%. Nonetheless, given their stellar performance in an underperforming industry and their ambitious plans to expand and round off their portfolio of services to cover all the functions of a complete logistics network, Allcargo Logistics looks like an interesting bet in the logistics sector in India.

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BSE is the largest stock exchange in the world in terms of listed entities. The company has been in this industry sector for close to 150 years and are still at the forefront of the industry in terms of technology and access to tradable products. The mutual fund platform shall help bring back growth into an exchange which has seen a number of transactions drop for the vast majority of their listed entities barring the top 100-200 ones. The company is also aggressively expanding its product portfolio on offer in order to capture market share in nascent segments and establish themselves at the top in every trading category in India. To push this expansion and market share capture, they are forgoing commissions in a lot of segments. It remains to be seen how long it takes for the company to strengthen its market positioning to be able to start charging commissions without any loss in market share and clientele. Nonetheless, given the storied history and dominant market positioning of the company along with their vast network of market participants both institutional and retail, BSE remains a stock to watch out for particularly given the increased market participation by individual investors and traders, which still has a lot of room to grow.

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Eicher Motors

Eicher Motors has been one of the highest-rated auto companies in India. This was mainly on the back of their successful turnaround of Royal Enfield and the emergence of the mid-sized (250cc-750cc) motorcycle market. Currently, the sales of the company have stagnated and margins have fallen a bit for the Royal Enfield and the VECV JV. The main cause for this has been the demand slowdown in the broad auto industry. The company still has robust exports and has been preparing to expand into newer markets both domestic and abroad. It remains to be seen how fast the company can expand successfully into newer regions and bring back sales growth and how long the industry demand slowdown shall continue to remain. Nonetheless, being an aspirational brand, the company should see a faster rise and revival should demand comes back to the industry. Thus given their strong product portfolio, aspirational brand value and their dominant status in their industry segment, Eicher Motors remains a good stock to watch out for, particularly given their recent fall in the share price.

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Mayur Uniquoters

Mayur Uniquoters has been one of the biggest artificial leather makers in the world. But the company has been through a rough patch in the past few years with stagnant revenues and decline of the unorganized footwear segment which was a big revenue generator for the company. Additionally, the focus segment of Auto OEMs has also been going through an industry slowdown which has further depressed the company’s revenues. It remains to be seen how long this auto slowdown shall last. Mayur has been proactive in attracting and negotiating with export customers despite the process being long and time-consuming. Nonetheless, the promise of their upcoming PUC leather segment and their export customer acquisition including Mercedes Benz and MG is what keeps this stock in our watchlist.

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Minda Industries

Minda Industries has been one of the top auto ancillaries in the country. They have steadily expanded their product offerings such that their kit value is increasing year on year with the addition of newer products in the mix. Their foray into alloy wheels has rewarded them well and is expected to deliver good growth for the company in the future. Despite the slowdown in the auto market, Minda aspires to maintain a double-digit growth rate mainly on the back of their expanding product portfolio and the greater demand for their products post-BS-VI implementation. But at the same time, they are totally dependent on the domestic auto market very heavily and any negative surprise in this sector or from one of their key clients like Maruti may put a question mark over their growth trajectory. Nonetheless, Minda Industries is definitely one stock to keep an eye on as they seem to be one of the companies best positioned to benefit rapidly once the BS-VI regulations are implemented and become the norm.

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Power Mech

Power Mech has been a consistent performer in the engineering and construction space. The company is making good headroom into the O&M business. The management expects the order book to grow consistently on the back of the foray into non-power sectors and the increased O&M work. The company has yet to show any signs that they have been affected by the general economic conditions in the market. However, the cancellation of one of the AP state projects and the putting on hold of another major irrigation project in the state raises questions about how the company’s operations will continue under the new government in the state. Nonetheless, given their optimistic attitude and recent performance, Power Mech looks like a reasonable bet in the construction sector at current valuation.

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Vaibhav Global

Vaibhav Global has established itself as an influential player in the jewelry exporting and telecommerce business. They have consistently delivered good revenue growth in recent years and continue to grow their business through newer selling mechanisms like through their website and app. The company has been very proactive with their 4Rs agenda for achieving their long term goals. The company has delivered good growth numbers on the back of their rapidly expanding web shopping business and have shown good market awareness by converting a lot of their TV only customers into multichannel customers who can be reached through the web as well. It remains to be seen how the company navigates the slow decline of traditional TV and the advent of streaming services. Nonetheless, on the back of their consistent success of the past few years and their proactive stance in following the 4Rs for sustained growth of the company, Vaibhav Global remains a good investment option for anyone banking on the jewelry or the telecommerce industry.

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2 thoughts on “Stocks We’re Watching”

  1. What is your view on very low operating cash flows generated by Power Mech. For FY19 it is dismal at 1.46 Cr. (consol). Over last 9 years, they have not been able to generate FCF. One argument could be that it is a growing company and hence need to invest in CAPEX but OCF hasn’t been very impressive.

    The main reason behind low OCF for FY19 this seems to be increase in receivables (which may be industry norm) and increase in other assets. The main component of other assets is Advance to Sub-contractors (mobilisation and works), advance for supplies of ~367 Cr. This is also industry practice but the mobilisation advances and advance against supplies or works received from the customers is ~33 Cr. Isn’t this unusual?

    Please share your thoughts.

    1. Hi Hardik,
      Thanks for your query.
      1. Low OCF or even negative CF is a feature of construction and infra companies in India. Even L&T does not produce positive OCF on a consistent basis. Hence, a positive FCF is a distant dream in most cases. There are some exceptions in the industry though like KNR construction. (Not a recommendation)
      2. Government is their customer most of the time, hence raising up mobilization advance is always a challenge.

      Due to the above factors and a few others, we believe long term investment in construction and infrastructure company has many risks attached to it. However, at a particular valuation, some companies may look interesting from a short term perspective (4 to 6 quarters).

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