Five years is a reasonable time-frame for equity investments, but at the same time returns of small-cap stocks can be volatile. Would this five-year close-ended scheme deliver?
Axis Mutual Fund recently filed an offer document with the Securities and Exchange Board of India (SEBI) to launch a five-year close-ended equity scheme—Axis Small Cap Fund. This close-ended scheme will automatically convert into an open ended equity scheme on completion of five years from its launch. As these schemes invest predominantly in small-cap stocks it is necessary to be aware of the risks associated with such investments. In just two months, for the period ending 31 March 2013, the S&P BSE Small-cap Index crashed by nearly 19%. The index, which consists of over 500 scrips, saw nearly 25 stocks crash by over 50%. Five years is a reasonable time frame for equity investments, but returns of small-cap stocks can be volatile. In a way, being a close-ended scheme would be beneficial for an investor as he/she would not get tempted to withdraw the funds seeing a huge decline or volatility in returns which is common in small-cap schemes. But at the same time, a lot would depend on when and where the scheme would invest to ensure the investors gets decent returns at the end of the period.
As per the offer document, the scheme would invest a minimum of 70% in small-cap companies which are defined as those which have a market capitalisation within the highest market-cap stock (or Rs5,000 crore, whichever is higher) and lowest market-cap stock on the BSE Small-cap index. The range of capitalization of BSE Small-Cap Index will be reviewed on an annual basis. Up to 30% of the assets would be invested in other equities, debt and money market instruments. As we have seen in the past, small- and mid-cap schemes use this allocation to their benefit and invest in large-cap stocks to reduce the downside risk. (Read: Small- and Mid-cap schemes: Cushioning the fall)
As per our analysis, only a few schemes where able to reduce their downside risk and still come up among the top performers when there is a sharp upmove. But to pick such schemes, a prior track record of performance is required. This being a new scheme from Axis Mutual Fund, it has no track record and could be risky. The fund house itself has been in existence for less than five years. The only two equity schemes from the fund house, which have a track record of above three years, are Axis Equity Fund and Axis Long Term Equity Fund. Both the schemes have done reasonably well compared to the benchmark.
The new scheme would be managed by Pankaj Murarka, who has over 11 years of experience in the equity markets. Managing a close-ended scheme would be an easier task as compared to an open-ended scheme as the fund manager would not have to deal with new inflows and outflows from the fund. However, when investing in small-cap stocks one needs to go deeper into the business and management of the company rather than relying only on the financials and valuations of the company.
This being a close-ended scheme, the units of the scheme cannot be redeemed by the unit holder directly with the fund until the maturity/ conversion date. Post maturity/ conversion date, scheme can be redeemed a) Physical units – with the fund, b) Demat unit – with the Depositor participants.
Other details of the scheme
BSE Small Cap
Minimum Application Amount
Rs5,000 and in multiples of Re1 thereafter
Maximum total expense ratio (TER) permissible under Regulation 52(6)(c)(i) and (6)(a): Up to 2.50%
Additional expenses under regulation 52(6A)(c): Up to 0.20%
Additional expenses for gross new inflows from specified cities: Up to 0.30%.
Supreme Industries, a leading plastics player in the country, has weathered a difficult economy and reported good numbers while making plans to expand
Supreme Industries has reported very good numbers for the March 2013 quarter. The stock was recommended in one of our Kensource stockletters, on 27 April 2012. Total income and operating profit for the third quarter ended 31 March 2013 amounted to Rs917.68 crore and Rs134.35 crore, as compared to Rs768.55 crore and Rs104.75 crore for the corresponding quarter last year, an increase of 19.4% and 28.26% respectively. Net profit amounted to Rs75.83 crore when compared to Rs54.68 crore for the same period last year.
The stock was recommended at Rs208 on 27 April 2012 in the stockletter. The share price of the stock is currently quoting at Rs312 on the Bombay Stock Exchange (BSE).
Our Moneylife database threw some interesting statistics. The company’s net sales grew at 19% which exceeded its three-quarter year-on-year (y-o-y) growth rate of 16%. Likewise its operating profit increased 28% y-o-y, to Rs134.28 crore, which has also exceeded its three-quarter y-o-y growth rate of 16%. Yet despite these good numbers, the valuation remains somewhat subdued, with its market capitalisation quoting at 7.34 times operating profit and just 1.07 times its net sales, while return on networth is a jaw-dropping 41% while return on capital employed is 26%.
Supreme Industries processed 2,01,125 metric tonnes (MT) of polymers for the nine months ended March 2013 when compared to the 1,77,439 MT processed during the corresponding period last year, achieving volume growth of 13%.
The company’s ongoing expansion plans involves a total capital outlay of Rs435 crore and is progressing as per the plan. Some of the money used will be spent on a new unit at Hosur for protective packaging products, a unit in Gujarat for expanding capacities of cross laminated film, a state-of-the-art plant for production of composite cylinders and pipes at Gujarat and, finally, a plastic piping system near Gwalior which will be in production by May 2013.
During the current year, the company envisages annual growth in volume and product value of about 16% and 23% respectively over the previous year.
Supreme Industries is India’s leading processors of plastics, offering a wide and comprehensive range of plastic products in India.
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The company which was recommended by Kensource last year, has delivered stellar quarterly results
Cera Sanitaryware which was recommended by Moneylife in our Kensource stockletter on 4 May 2012 has continued to impress. Its net sales for the quarter ended 31 March 2013 grew 58% year-on-year (y-o-y), from Rs100.21 crore to Rs157.95 crore. During the same quarter, its operating profit grew 30% y-o-y to Rs20.73 crore. Its net profit rose even higher, from Rs9.29 crore to Rs13.93 crore, a 49.9% growth.
Earlier, we had recommended the stock in our Kensource Stockletters, a subscription-only service, at Rs265 on 4 May 2012. Currently the stock is trading at Rs440 at time of writing this piece.
A closer analysis into Cera Sanitaryware results reveals that net profit has been steadily growing since June 2010 from Rs5.99 crore to Rs13.93 crore, without a single fall in y-o-y growth rate. Similarly, sales too have been increasing without a dip in growth rate. The average three-quarter growth rate is 55% while sales growth for the March 2013 quarter trumped it by growing at 58% y-o-y. The company has been managing its operations quite well, in a volatile environment. Yet the market seems to be discounting this stock, with its market capitalisation quoting at just 6.79 times its operating profit. Its return on networth and return on capital employed stood at 33% and 27% respectively, both astonishingly high, for a ceramics manufacturer selling end products.
Total assets of the company stood at Rs379.66 crore as at 31 March 2013, when compared to Rs294.59 crore recorded at the same date last year.
The production capacity is expected to go up to 2.7 million pieces per annum from 2.0 million pieces. It manufactures faucets, sanitaryware and bathware. The company continues to import and market, under the brand name CERA, wellness range of products like shower cubicles, shower panels, steam cubicles in addition to high-end sanitaryware as well as kitchen sinks, mirrors and sensor products.
The company’s board has recommended a dividend of Rs4 per full paid equity shares of Rs5 each.
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