12 high quality small cap recovery plays - Ambit

Over the last 4 months BSE Small Caps have risen by 12% compared to the 16% rise in the Nifty. Going forward, as we enter an economic recovery, small caps seem likely to outperform as they have been disproportionately hammered (both fundamentally and from a stock price perspective) in this prolonged economic downturn. In this note we highlight 12 stocks with market cap of less than US$0.5 bn which could be disproportionate beneficiaries in a rallying stock market.

The sheer persistence of this economic downturn (five consecutive quarters of GDP growth decelerating) combined with relentless rate hikes by the RBI (11 repo rate hikes by the RBI before the April '12 cut) has meant that small caps have been hammered over FY11 and FY12 (see pages 3-4 for more details).

With our Economist, Ritika Mankar, being of the view that GDP growth in FY13 will be 6.3% (vs 5.5% in Q1 FY13) and then 7.1% in FY14, arguably small caps are the best way to play an impending economic recovery. With that in mind, in this note we highlight 12 high quality small cap stocks (defined for the purposes of this note as stocks with market cap below roughly $0.5bn). The ideas profiled in this note are summarized below.

Bajaj Electricals (BJE IN, mcap US$375 mn, NOT RATED, 3 mth ADV US$0.3mn, 12 mth price change 10%): Market leader in the small domestic appliances.

Balkrishna Industries (BKT IN, mcap US$518 mn, BUY, 3 mth ADV US$1.2mn, 12 mth price change 62%): Leading exporter of Off-Highway tyres.

Elgi Equipments (ELEQ IN, mcap US$248 mn, NOT RATED, 3 mth ADV US$0.1mn, 12 mth price change 20%): The local market leader in air compressors.

Greaves Cotton (GRV IN, mcap US$356 mn, BUY, 3 mth ADV US$0.3mn, 12 mth price change (12%)): Largest manufacturer in India of lightweight single/dual cylinder diesel engines.

Heidelberg Cement (HEIM IN, mcap US$203 mn, NOT RATED, 3 mth ADV US$0.4mn, 12 mth price change 32%): Indian subsidiary of the world's fourth largest cement manufacturer.

ICRA (ICRA IN, mcap US$228 mn, NOT RATED, 3 mth ADV US$0.1mn, 12 mth price change 30%): The second biggest credit rating agency in India.

Infoedge (INFOE IN, mcap US$719 mn, BUY, 3 mth ADV US$0.2mn, 12 mth price change 0%): A leading Indian online classified firm present in the recruitment, real estate, and matrimony verticals.

Kirloskar Oil Engines (KOEL IN, mcap US$460 mn, NOT RATED, 3 mth ADV US$0.1mn, 12 mth price change 21%): Market leader in small-medium segment diesel engines.

Motilal Oswal (MOFS IN, mcap US$295 mn, BUY, 3 mth ADV US$0.1mn, 12 mth price change 33%): One of the largest and one of the more trusted retail and institutional stock brokers in India.

Sadbhav Engineering (SADE IN, mcap US$414 mn, BUY, 3 mth ADV US$0.5mn, 12 mth price change 4%): The strongest player amongst mid-small sized construction companies.

Supreme Industries (SI IN, mcap US$666 mn, NOT RATED, 3 mth ADV US$0.2mn, 12 mth price change 59%): Fastest growing firm in the plastics processing business in India; no major competitor for its Cross Laminated Films offering.

WABCO (WIL IN, mcap US$578 mn, NOT RATED, 3 mth ADV US$0.2mn, 12 mth price change 27%): Market leader in airbrake systems for medium & heavy commercial vehicles in India.

Source : Equity Bulls

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