Small comes big on value & growth

Warren Buffett once said, 'Growth and value are joined at the hip.' Growth at a reasonable price (GARP), an investment strategy, precisely resonates with his words, wherein the traits of both growth and value investing are considered while picking up stocks.

To put it in other words, this strategy looks for those companies that are available cheap as compared to their earnings growth. In this article, we have picked up some small-cap stocks that are undervalued at present. Nevertheless, they were able to deliver strong growth in the past and hold the potential to replicate it in the future as well.

For this analysis, we have identified those companies that have witnessed profit growth of 20 per cent or more (CAGR) over the last five years, while their price to earnings ratio has been less than 15. In addition, they have generated a return of at least 15 per cent for equity shareholders in the last three years and possess positive operating cash flows. Given the solvency part, we have limited the debt-to-equity ratio to one.

Filters used
Five-year EPS growth > 20 per cent
One-year EPS growth > 20 per cent
Latest quarter EPS growth (Y-o-Y) > 20 per cent
Debt to equity < one
Price to earning < 15x

NRB Bearings
NRB Bearings is the first manufacturer of needle bearings, used in automobile components, in India. As a leading name in this space, it commands a market share of ~70 per cent and caters to prominent domestic OEMs, such as Hero Motocorp, Bajaj Auto, Maruti Suzuki, Tata Motors, Ashok Leyland, to name a few. In addition, it has carved a niche for itself in manufacturing conventional roller bearings and lightweight drawn cup bearings, which are also used in automobile components.

Since needle bearings are a customised product, NRB needs to work alongside its clients. It paves the way for the company to build a long-term relationship with almost all major domestic OEMs and diversify its client portfolio. About 25 per cent of its revenues came from exports in FY18. Some of its notable global clients include: Renault, Volvo, Daimler etc.

In terms of financials, earnings in the last 12 months have grown by more than 75 per cent over the past one year and around 26 per cent compounded annually over the last five years. The company is steadily decreasing its debt, with the present debt-to-equity ratio at 0.57. Over the last three years, its ROE has been moving up, reaching at 27.24 per cent in FY18.

Meghmani Organics
This well-diversified company is present in pigments (30 per cent of revenue), agrochemicals (36 per cent) and basic chemicals (34 per cent). It has a global distribution network, along with subsidiaries in the US, Dubai and China. Exports contributed around 52 per cent to its total revenue as of December 2018.

It commands a 14 per cent global market share in the pigments segment and is one of the largest pesticide producers in India. Its pigment product portfolio includes Pigment Blue and Pigment Green, with a total capacity of 32,940 MTPA.

When it comes to its financials, earnings in the last 12 months have grown at a rate of 59 per cent compounded annually in the past five years. EBITDA margins improved to 25.04 per cent in FY18 from 15.8 per cent in FY14, translating into an ROE of close to 30 per cent. Over the last five years, its debt-to-equity ratio has reduced to 0.44 in FY18 from 1.46 in FY14. Currently, the stock is trading at a PE of 6.9x, which is well below its five-year median of 11.9x.

Sonata Software
Sonata has been providing IT services and software solutions to customers worldwide for over 30 years. Operating under two major heads, namely International IT services (IITS) and Domestic Products and Services, its service offerings cater to industry verticals like travel, retail, distribution and software solutions.

Its focus on providing IP-led services has resulted in an increase in the demand for its IPs, comprising Rezopia, Halosys and Brick & Click. It's one of the preferred development vendors for Microsoft.

Over the past five years, the company's earnings have grown at a rate of 31.6 per cent compounded annually, while its return on equity has maintained an average of close to 30 per cent. The stock currently trades at a PE of 14.8x and has compounded its investors' wealth by more than 49 per cent over the last five years.

Disclosure: The intent of the article is not to recommend any specific stocks. If you wish to invest in any of the above-mentioned securities, please do thorough research.