We come across a large number of interesting stocks in Capitalmind SNAP Outliers, our discovery tool for stocks with momentum. See a video of how Outliers works, and how to use Outliers to find all-time highs. Here’s a stock we found interesting that’s been an outlier. Catch them all here.
Incorporated in 1972, Eimco Elecon is a manufacturer of equipment for Mining and Construction Industry. Mining accounts for 96% of the company’s business activity making the company highly dependent on mining companies.
Eimco had been growing at a steady pace for quite a period of time before it started to stagnate and saw a decline in sales for the year ended March 2016. This year in 2017 has been better with sales growing 22% year on year.
This is a tiny-cap – at just Rs. 300 cr market cap, and promoters control a significant percentage. You can’t trade this stock easily in large quantities – which is also why there isn’t too much institutional interest in it.
The positive aspect though is that despite the fluctuation in terms of sales, the company has been able to maintain margins in double digits. Only for the current year has there been a decline in margins but only to 11.5%. A decline in margins even as Sales increased would suggest that the company is trying to be a bit aggressive in getting orders at the cost of profitability.
The stock for most periods of time is very strongly correlated to the Nifty Metal Index which isn’t much of a surprise given how dependent the fortunes of the company are on the Mining Industry at large. Nearly 90% of revenues come from the mining sector.
The stock made a high of 750 just as the market was topping out in 2008 and took a pretty heavy tumble falling 87% literally matching Nifty Metal all the way to the bottom. While markets recovered and even made new highs, the stock was stuck even as financially it became better over time.
The biggest surprise was seeing the stock retest the 2008 lows in 2013, a year when it was close to its best financial performance ever seen. The stock has since recovered and while it’s yet to see the highs last seen in 2008, its at the closest point it has even been.
At 15 times earnings, the stock doesn’t appear to be expensive but given the low Return on Equity of just 8%, there isn’t going to be a major re-rating happening anytime soon either.
The positives: It’s a zero (long term) debt company, and promoters own 75%.
A recent announcement was one regarding Credit Rating for advances that are currently taken as well as for future borrowing. Even though the company has near zero debt, it has some letters of credit (which are typically short term in nature). CRISIL has assigned A+/Stable (Reaffirmed) for Long-Term Rating and A1+ Reaffirmed for Short-Term Rating as per their letter dated 24th May, 2017. This means that the company is solid in terms of cash flow in the Short Term (A1+ is simply the best rating in the short term)
But an A+ in the long term isn’t that great, so the cyclical nature of the business will impact longer term rating (and thus, the interest the company pays for longer term debt).
Previous Posts in “Outlier in Focus”:
Find the rest here – Outlier in Focus