According to data from Screener.in (which records super-investors’ holdings above 1%), Khanna added three stocks to her portfolio as of the September quarter.
What makes these fresh additions fascinating is that they aren’t even on the radar of India’s biggest investment houses. Domestic institutional investors (DIIs) manage billions in assets and employ teams of analysts, but have stayed away from three companies that Khanna finds worthy of investment. The obvious question is: what does Khanna see that the DIIs don’t? Or is there some other reason why she invested?
In any case, the fact that these companies may have escaped institutional attention while passing Khanna’s stringent investment criteria makes this a compelling setup.
Let’s take a look at the three stocks in question.
#1 20 Microns Ltd
First in the list is 20 Microns Ltd, in which Khanna bought a 1.29% stake as of the September quarter, according to exchange data.
The company is India’s largest producer and supplier of ultrafine industrial minerals & speciality chemicals, and has a market cap of ₹789 crore.
As we said earlier, DIIs (which include mutual funds) hold a measly 0.02% of the company. Foreign institutional investors’ holdings, however, have grown in small increments in recent quarters, from 0.72% in the September 2023 quarter to 1% in the September 2024 quarter. This may be a small number, but keep in mind this investment comes amid a record exodus of FIIs from the Indian stock market.
One of the reasons for Khanna’s investment could be the company’s acquisition of 545,454 shares in its Malaysian subsidiary, 20 Microns SDN BHD, for about ₹25 crore. The subsidiary specialises in trading calcium carbonate and producing superfine limestone powder products.
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The company’s steady financial growth could be another reason for Khanna’s investment.
Sales grew at a compound annual growth rate (CAGR) of 10%, from ₹480 crore to ₹777 crore, between FY19 and FY24. Net profits over the same period increased from ₹25 crore to ₹56 crore, at a CAGR of 18%. Ebitda rose from ₹69 crore in FY19 to ₹106 crore in FY24, at a CAGR of 9%. The operating profit margin at the end of FY24 was 14%, and has been between 12% and 14% over the past five years.
The current share price is about ₹224, having grown 580% in absolute terms or a CAGR of 46% from ₹33 five years ago.
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Note that during the September quarter, when Khanna was reported to be buying the stock, its price had spiked. Since then, there has been a sharp correction in the price.
This was probably triggered by an increase in its debt from ₹121 crore as of the March quarter to ₹131 crore as of September quarter. Another reason could be the decline in operating profit margin from 15% to 13% as of September quarter.
Yet another reason could be the acquisition of the Malaysian subsidiary. What Khanna sees as an opportunity, others may have seen as an additional burden on the company’s finances.
The stock is currently trading at a price to earnings ratio of 13.3, below the industry average of 19.5. Part of this could be attributed to the recent selloff. The 10-year median PE ratio of the stock is 9.31.
20 Microns has started serving customers in Eastern Europe, Russia, Italy, the Middle East, Southeast Asia, and other markets. The company has also launched new products and is looking forward to competing with Chinese products.
#2 Emkay Global Financial Services Ltd
Emkay Global Financial Services Ltd (EGFSL) offers a range of financial services including stock broking, asset management, wealth management, investment banking, and financial product distribution for both institutions and individuals. Its market cap is ₹706 crore.
DIIs holding no stake in the company while FII holdings fell from 1.17% as of the March quarter to 0.77% as of the September quarter.
As of FY24, the company’s asset management wing (portfolio management service and alternative investment funds) had ₹902 crore in assets under management, up 38% year-on-year. Its wealth management AUM grew 42% year-on-year to ₹3,177 crore. With more than 43,500 customers, the company’s total assets under management was ₹37,544 crore as of FY24, according to its annual report. These encouraging numbers are perhaps another reason why Khanna decided to invest.
Another, of course, is the growing number of investors in India. The total number ofdemataccounts in India touched 175 million in September, according to a Motilal Oswal report. About 4.4 million new accounts were added during the month, resulting in an average addition of 4 million accounts a month so far in FY25.
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With a rise in the number of high-networth individuals, the industry could be on the verge of a boom.
According to the Financial Services Industry Report by India Brand Equity Foundation (IBEF), the number of ultra-high-networth individuals (UHNWIs) is estimated to increase by 63% from 12,069 in 2022 to 19,119 in 2027.India is also expected to have 1.66 million HNWIs in 2027.
Coming to the financials, sales grew from ₹147 crore in FY19 to ₹314 in FY24, at a CAGR of 16%. Net profit grew at a CAGR of 32%, from ₹9 crore to ₹32 crore, over this period. Ebitda grew at a CAGR of 19%, from ₹23 crore to ₹56 crore. The operating profit margin was 15% in FY19 and 18% in FY24.
The stock price has shot up to ₹283 from ₹68 five years ago, clocking 316% absolute growth and 34% compound annual growth.
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Emkay stock trades at a PE ratio of 13.64, lower than the industry average of 15.2. Its 10-year median PE ratio is a modest 13.25.
All in all, Emkay has shown solid financial performance in the past few years. Club that with its impressive AUM growth and you might just see why Khanna decided to swim against the tide to pick up a stake in the company.
#3 POCL Enterprises Ltd
POCL Enterprises Ltd is one of India’s leading manufacturers of metallic oxides such as lead oxides and zinc oxide, apart from PVC stabilisers and zinc and lead themselves. It has a market cap of ₹545 crore.
No DIIs or FIIs had a stake in the company as of the September quarter. Given that it’s a micro cap company, it isn’t a shock that DIIs are keeping their distance. So, what could have sparked Khanna’s interest in the stock?
Well, India’s auto sector is booming and electric vehicles (EV) are the next big thing. So it’s no wonder that India’s battery ecosystem is also picking up speed. POCL’s main business – selling products used to make batteries – has consistently brought in more than 60-65% of total earnings in the past few years.
With electric vehicles becoming more common worldwide, companies that supply auto parts are finding new growth areas. It’s no wonder that Indian Brand Equity Foundation predicts that India’s EV battery market will grow from $16.77 billion to $27.70 billion in just five years
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The company’s sales grew at a CAGR of 20% from ₹454 crore in FY19 to ₹1,120 crore in FY24. The company made a loss of ₹6 crore in FY19 and a net profit of ₹18 crore FY24, implying a CAGR of 37%. Ebitda grew from ₹4 crore in FY19 to ₹39 crore in FY24, at a CAGR of 57%. The operating profit margin improved from 1% in FY19 to 4% in FY24.
The stock has shot up to ₹195 from ₹6 just five years ago, clocking 3,150% absolute growth and a CAGR of 101% over this period.
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The stock currently trades at a PE ratio of 19.7, almost half the industry average of 38. Its 10-year median PE ratio is 11.2.
The company laid out its expansion plans in its latest investor presentation. It plans to set up an additional refining and smelting unit with a capacity of 11,000 million tonnes per annum (MTPA) and 11,000 MTPA, respectively. POCL also plans to expand and upgrade its lead oxide facilities to improve efficiency as it is currently running at full capacity. Management is also exploring the possibility of selling and exporting zinc.
Who’s right, Khanna or DIIs?
We’ll never know what Khanna sees in these three stocks that DIIs don’t. Maybe the DII’s see something she hasn’t. Either way, time will tell who made the right call. Add these stocks to your watch list and see how the story plays out.
For more such analysis, read Profit Pulse.
Note: We have relied on data from Screener.in, Trendlyne.com and Tijorifinance.com throughout this article. Only in cases where the data was not available have we used an alternative but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.
Suhel Khan has been a passionate follower of the markets for over a decade. During this period, he was an integral part of a leading equity research organisation in Mumbai as its head of sales & marketing. He now spends most of his time dissecting the investments and strategies of India’s super-investors.
Disclosure: The writer and his dependants do not hold the stocks discussed in this article.
