Fortune Scrip

Published: Dec 29, 2021
Updated: Dec 29, 2021

David with a Goliath’s record

Our readers may be intrigued by my selecting a small cap company as the Fortune Scrip for this fortnight. Its equity capital is not even Rs 1 crore — Rs 88 lakh, to be exact! It’s Ahmedabad-based Sri Jagadamba Polymer, a three and a half decade-old company engaged in the manufacture of technical textiles, polypropylene/polyethylene fabrics on both circular as well as sulzer looms, geo-textile products and various technical textile products which find their application in the agriculture, infrastructure and packing segments. The company’s plant at Dholka near Ahmedabad has an installed capacity of 1,000 tonnes per month to process woven polypropylene/polyethylene fabrics. The company is also engaged in power generation and has a windmill capacity of 3.6 MW. Promoted by first-generation entrepreneur Ramakant Bhoj Nagarwala, the company has made rapid strides since inception, despite its small size. During the last 10 years, its sales turnover has grown at a CAGR of 22.24 per cent and the profit at net level has zoomed at a CAGR of 126.36 per cent.

Interestingly, the pace of growth has been consistent. During the last five years, sales have expanded from Rs 147.71 crore in fiscal 2017 to Rs 238.56 crore in fiscal 2021, with the net profit surging ahead from Rs 5.71 crore to Rs 40.91 crore during this period. The company’s financial position is very strong. At the end of March 31, 2021, its reserves stood at Rs 91.32 crore – almost 104 times the equity capital of Rs 88 lakh. Borrowings are negligible and this is virtually a debt-free comPerformance Indicators (Rs. in crore) pany. The company is regularly paying dividends and the rate for the last year was 40 per cent. Sri Jagadamba’s stocks are in good demand and are quoted around Rs 690 per face value of Re 1.

BRIGHT FUTURE

The small company has made big strides in all these years and can offer excellent returns to investors. Future prospects for the company are highly promising and shareholders can expect to reap a rich crop going ahead. Consider:

• Financially, the company is on a sound footing. It has an operating profit margin of over 12 per cent over the last 10 years of and has achieved an OPM of 18 per cent for the last year ended March 2021. The net profit margin during the last 10 years has been around 9 per cent, while it was 12 per cent for fiscal 2021. In fact, the OPM and NPM for the last year (fiscal 2021), at 18 per cent and 12 per cent respectively, are the highest in the company’s history so far. Sri Jagadamba has amassed huge reserves of Rs 91.32, while the net debt which had gone up to Rs 40 crore during 2014-2016 has been slashed substantially. Furthermore, the interest burden which had gone up to Rs 3.12 crore in fiscal 2016-17 has come down to Rs 2.66 in fiscal 2021, which is negligible when viewed in the context of sales turnover (Rs 239 crore), operating profit (Rs 55.18 crore), net profit (Rs 40.91 crore) and reserves (Rs 91.32 crore).
• The company’s financial position is very strong. Its liquidity profile is highly comfortable with current ratio of 1.86 times and average fund based working capital utilizations at around 40 per cent. Moreover, liquidity is supported by healthy cash accruals and need based support from promoters. SJPL has unencumbered cash and bank balance at comfortable level. Further, in absence of major term debt repayment obligation and steady cash accruals, the liquidity of the company is expected to remain strong.
• The company has an excellent operating efficiency which has kept it ahead of its peers, even though its scale of operations is rather small. Its inventory-turnover ratio is stable and improving, indicating that the company is not suffering from cash being trapped in the inventory. The company has been able to collect payment from its customers and as a result, the receivable days have dropped from 57 days to around 30 days. There is a stable and steady improvement in the net fixed asset turnover (NFAT) ratio over the past 10 years from 2.24 to 11.10, which is considered very good. Again, the company’s efficiency in converting profits into free cash is steadily rising, indicating that it can convert profits into free cash. Virtually a debt-free company with a highly satisfactory return on capital employed (RoCE) of over 40 per cent and an appreciable return on equity (RoE) of around 36 per cent, this is certainly an attractive buy.
• The company has Established very cordial relationship with customers. The company’s majority of the production (around 80 per cent) is exported to countries such as United Kingdom (UK), United States of America (USA), China and other European countries. SJPL has been successful in establishing a stable customer base in these countries. Although, it does not have any long-term agreements in place with its customers, SJPL has been able to secure repeat orders from its customers due to conformity to quality standards and specifications which mitigate the risk to a certain extent.
• zThe technical textile market is steadily expanding at the global level, while there are many small and medium players in India and the market size is around Rs 175,000, indicating that there are very good prospects for Shri Jagadamba going ahead.
• In order to remove limitations to growth, the management has decided to double the capacity of the plant to 2,000 tonnes. This will go a long way to push up the topline as well as bottomline of the company.

Realising the bright prospects ahead, investors have started rushing to grab SJPL and the stock price has zoomed to cross the Rs 1,000 mark and reach near Rs 1,095. I feel the prospects ahead are highly promising but it will be wiser to wait for a reactionary fall and accumulate these stocks at every decline.