Four small-cap stocks that proved their growth credentials in the December quarter

The December-quarter results season is here. Around 400 of the Moneylife sample of companies have already declared their results. From the first cut of December, we have identified several stocks that seem to be on a strong growth path. Here are four of them worth buying at the suggested prices.

Bajaj Electricals (BE) is known for its customer appliances and lighting & luminaries. However, it has another division—engineering & projects (E&P)—the prospects of which look brighter. Although it contributes the smallest part of BE’s total revenue, it is the fastest-growing segment. Revenues from the E&P segment rose 74% in December 2009 over those in December 2008. Revenue from the lighting segment grew 36%. The lighting segment produces fluorescent tubelights (FTL), general lighting service lamps (GLS) and compact fluorescent lamps (CFL).

The E&P segment carries out project operations such as high-mast lighting, installation of telecom towers and power transmission & distribution (T&D).

Illumination of the cricket stadium at Jaipur, designing, supplying, installation and commissioning of lighting at Chennai Port’s container terminal are some of the projects it has completed. Another growth area will be rural electrification under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) for which the government will invest Rs35,000 crore in the 11th Five-Year Plan to provide electricity to below-the-poverty-line population in rural areas. BE has grabbed four major orders from National Electricity Supply Company Limited (NESCL) and National Hydro Power Corporation (NHPC) worth Rs360 crore. The projects division has a pending order book of Rs835 crore and expects to get other orders worth Rs200 crore in the current fiscal. It has recently raised Rs160 crore to retire some of its high-cost debt as well as for expansion. It is also looking for acquisition in the consumer durables and lighting segments. In the December quarter, BE reported sales growth of 39% and operating profit growth of 42%. Its market-cap is 0.85 times its December-quarter sales and 7.81 times operating profit. Buy the stock at around Rs164.

ABC Bearings makes taper, cylindrical, roller and ball thrust bearings for the commercial vehicles and tractors segment. The domestic bearings industry is dominated by 10 large players and a large number of units in the unorganised sector. Demand comes from the automobile and industrial sectors. The company has a very small share of the overall bearings market but it is a leading supplier of cylindrical roller and tapered roller bearings to the commercial vehicles and tractor segment. The company focuses in a niche market where it is among the larger players and, therefore, can spread its fixed costs across a large output. This enables it to be one of the lowest-cost producers along with SKF India. In 2007, it signed an agreement with the Japanese ball-bearing manufacturer NSK Limited to set up a unit near Chennai to produce bearings for transmission and magnetic clutches, besides hub unit bearings. This has helped ABC to broaden its portfolio.

The industry faced a tough time in 2008-09 because of the economic slowdown that contracted demand. With a major part of its revenue coming from the commercial vehicles and tractor segment, ABC performed poorly.

The company is now shifting its dependence from the automobile sector to the industrial bearings sector. It will also manufacture slew bearings, used in windmills, cement plants and steel mills. ABC also plans to increase its share from exports which are currently small. Its major domestic clients include Tata Motors, Mahindra & Mahindra, Ashok Leyland, Escorts, Greaves, Bajaj Tempo,  Swaraj Mazda and Toyota Kirloskar. The concern is threat of imports. Volatility in steel prices is another major concern. As the business lacks pricing power and suffers from the cyclicality of its customers’ business (such as CVs), sales cannot be increased if steel prices rise. The December quarter was great; the company posted 79% growth in sales and 233% growth in operating profit. Its market-cap is 0.76 times its December-quarter sales and 5.62 times operating profit. Buy the stock at around Rs72.

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