A Smallcap for Your Watchlist Amid Market Correction 

Dear Viewers

The recent correction has wiped off trillions from the stock market.

If you tune to financial channels, you will see the experts listing out reasons.

Iran Israel conflict, China stimulus, regulatory changes, and so on.

That's mainstream media for you - good at coming up with a whole host of reasons for every fall, or gain.

Guessing the timing or factor for market correction does not exactly help and is a futile exercise.As I keep sharing, the list of 'unknown unknowns' in the markets is always bigger than what I and the experts can know and talk of.Bottomline - Don't try to predict, always be prepared.

Indian stock markets have been overvalued for some time now. And despite recent correction, remain so.

Marketcap to GDP ratio, price to earnings, price/earnings to growth ratio, or Smallcap to Sensex ratio, whichever metric you choose, the stats suggest a huge premium to median valuations.

But the most revealing sign of the froth in the market is insider selling.

The insider sales are estimated at Rs 1 trillion this year. At this rate, it's almost six times of selling in 2018.

When the owner of the business is ready to sell his stake in the open market, there is a very good chance that he is getting a very good deal. Unfortunately, at the other side of this deal are the retail and institutional investors.

Don't be surprised if the correction goes deeper. In fact, in this scenario, look for some defensive themes in investing.

Speaking of which, wedding is one theme that deserves attention.

India is home to one crore weddings annually and is the fourth largest sector in India.

Vanity, celebration, aspirations and a once in a lifetime event...the emotions behind this event are such that people don't mind splurging, thus making it a defensive theme.

For most Indian families, this is the most expensive they save for their entire lives and spend it with a sense of pride.

Some may find this extravaganza unnecessary, but the truth is it keeps the economy lubricated. In the prime season, the business generated through weddings is estimated at over Rs 4 trillion.

The typical budget for a wedding doles out huge share for venue and catering, gifts, wedding jewelry and garments, honeymoon, and event planning.

Some of the obvious names riding these themes are jewelry companies - Titan, Kalyan, PC Jewellers, Senco Gold, Sky Gold , Thangamayil, PN Gadgil &Sons .

Within wedding attire, the well-known listed players include Vedant Fashions, Raymond, Arvind Fashions.

Within the gifting segment, companies like Ethos and La Opala tend to benefit.

For honeymoons, it is companies like Thomas Cook that ride the trend.

You could find a bigger list of wedding related stocks in the link below the video.

But there is one specific company that I want to talk about in detail - Sai Silks (Kalamandir) Ltd.

Remember I mentioned heavy insider selling at the start in this overvalued market.

Well, one of the reasons I am digging deeper into this company is contra trend. Insiders recently have bought this stock through an open market purchase.

Sai Silk is one of the leading players in South India that offers ethnic apparel and value-fashion products through its four store formats - Kalamandir, VaraMahalakshmi Silks, Mandir, and KLM Fashion Mall.

Kalamandir is directed at middle income segment, VaraMahalakshmi focuses on premium segment, Mandir is for ultra-premium and KLM fashion mall is for the value segment.

Its offerings are priced between Rs 200 to Rs 3.5 lacs. Its ethnic brands have one of the industry's leading repeat purchase rate.

Do note that South India itself is the largest saree market in Indian wedding and festive wear - accounting for about 50% of the organized market.

The company is present across four states - Telangana, Karnataka, Andhra Pradesh, and Tamil Nadu, through online and offline channels. The company has plans to enter Kerala and Maharashtra as well.

From 6.5 lakh square feet of total store area, the company has plans to add 90,000 sq ft and then grow this base at 10-15% every year in new stores.

The stores are mostly under a lease model. The company has 61 stores. By the end of 2026, the target for number of stores is 100. Most of this expansion will be on premium format, and the management expects better margins. It posted 18% operating profit or EBITDA margin in FY24.

The saree market is witnessing a shift from unorganised to organised sector. The share of organised sector was 14% in 2007 and improved to 32% in FY20. This shift bodes well for players like Sai Silks.

June quarter this year witnessed exceptionally small number of weddings in a decade, leading to a muted performance, and probably leading to stock price correction. The wedding dates in June quarter were down 70% YoY. Despite that, the company maintained 41.3% gross profit margin.

The debt is within a comfort range. The return on capital and return on equity in FY24 stood at 19% and 14%, respectively.

The stock was listed a year ago. The price band for IPO offer was Rs 210-222. It is currently trading at a discount from that price and is down 46% from its peak. At Rs 167, the stock is trading at a PE ratio of 30 times. The recent insider buying was at a level of Rs 174.

Now do note that this is not a stock recommendation. The business has some inherent risks related to competition, execution on the store expansion front as well as shifting consumer preferences. Any investment decision should be backed by due diligence.

But amid an uncertain geopolitical environment and froth in the market, this is a company you can put on your watchlist as a play on the defensive wedding theme.

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Thank you for watching. Good bye.