SME Watchlist with 'Insider' Edge 

Dear Viewers

The Indian stock markets are dealing with two realities that are highly conflicting.First, the huge influx of money. The number of demat accounts, first time investors, retail participation, inflows through SIPs have witnessed sharp rise. So much so that the impact of FII volatility has been subdued. Financialization of savings is in full momentum, giving legs to the rally.And then there is another reality - that the markets are frothy. Sensex PE at 24 may not raise eyebrows yet. But smallcaps, microcaps and SMEs are a different story.The BSE SME IPO index has grown over 50% CAGR in 10 years. Most of these gains have come in the post Covid market rally.

I'm wary of this space. The key concerns are limited disclosures and lot sizes, that make it too late and illiquid to exit in case business does not turn out as expected.

But for the many cases of gains disappearing in the thin air, there are some cases where SME stocks have proved they belonged to a different league. Some of the SME stocks overtime have migrated to mainboard, addressing the concerns I mentioned before.

So while there could be many potential 'Varanium Cloud' like companies, there could be a few Gensol like candidates too that have multiplied returns overtime.

For investors with high risk appetite, reduction in lot size is also a welcome event, which exchanges come up with every six months.

As such, it wouldn't be a bad idea to track SME stocks.

So where do you start building a watchlist for potential multibaggers in this space which is inherently risky?

I believe tracking insider action is a good point. As I have shared before, this is a metric I track for smallcap companies.

Over last few months, I have noticed some SME companies figuring in the list.

And for this discussion, I'm focusing on companies where the prices at which insiders have bought recently is close to the current price.

The first is Vilas Transcore, with marketcap of Rs 10 bn. The company manufactures and supplies power distribution and transmission components, mainly to transformer and other power equipment manufacturers.

It has two manufacturing facilities in Gujarat with capacity of 12,000 tonnes per annum. It is adding another 24,000 tonnes capacity this year. As such, the capacity is increasing 3 times.

Its clients include Voltamp Transformers Limited, Electrotherm India , Atlas Transformers India Limited, Shilchar Technologies Limited, etc. With the investments in the power and transmission sector, the company's products are likely to be in demand.

Its revenue in FY24 stood at Rs 3 bn, with operating profit margin at 11%. The company is net debt free. The return on capital employed stands at 22%. The stock is trading at 43 times earnings. The latest insider buying has happened in August at a price of Rs 425. As I record this, the stock is trading lower than that at Rs 392.

The next is SKP Bearings Ltd, with a marketcap of Rs 4 bn. The company makes & supplies Precision rolling elements. The sectors it caters to include auto, textile, bearing, pharma , electronics, aerospace etc . In February this year, it acquired a French entity with expertise in precision rolling and ball production , that marks its foray in Europe and will help it expand its global footprint. It will also allow the company offer an enhanced range of products from different materials such as stainless steel, brass, aluminium, and glass. Potential user industries for these products include automotive, aerospace, medical devices, industrial machinery, and consumer electronics sectors worldwide.

Its revenue for FY24 stands at Rs 5 bn with EBITDA margin of 34% and net profit margin of 21%. The return on capital is 16% and debt to equity is at 0.5 times. The price to earnings stands at 35x.

In September this year, the insiders have bought shares from the open market at an average price of Rs 219 , investing almost Rs 2 crores . As I record his, the current stock price is Rs 235.

The third is Harshdeep Hortico. The company makes and supplies planters for indoor and outdoor use. Besides, it sells accessories like garden hose pipe & water can. Recently, it has entered into the field of roto moulded outdoor furniture. It markets its products to around 27 states & union territories in India. Majority portion of the revenue comes from the state of Maharashtra. It has two manufacturing facilities and three stores in Delhi, Pune, and Andhra Pradesh, along with distributor and online channel.

The company has a debt free balance sheet. On a revenue base of Rs 480 m in FY24, its operating profit margin and net profit margin stand at 22% and 13.6% respectively.

The return on capital employed is 25%. The business is working capital intensive, which needs to be monitored along with growth prospects.

The stock's PE stands at 17x. It has witnessed regular insider buying, latest in September at a price of Rs 71 per share, close to the current stock price.

Do note that no view on any of the stock is implied in the video.

The SME space is inherently risky and needs due diligence. That said, I believe these are some of the names to track in SME space. Some of these may migrate to the mainboard, thus addressing liquidity concerns over time.

With this, I have come to the end of the video.

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