Value Investors dream and Cyclicality
Value Investors dream and Cyclicality
Imagine a non-cyclical stock in a cyclical industry that has high growth at a decent valuation multiple. (with a stock idea in the thread).
Cyclical stock ideas - the crisis
Cyclical stocks have the reputation of being extremely risky but also generating the highest returns if bought and sold at the right time (inflection point). Mistiming the entry & exit can lead to major opportunity costs, either in terms of capital or time. Among these industries, the cycle is defined by demand and expansion. They see demand in a boom in their business cycle during which they clean up their books and take up major expansion projects. This expansion eventually pushes the stock prices down to the bottom of the cycle.
A few examples through time are from industries like Auto, Commodity Chemicals, Steel & Cement (also PSU to a major extent), etc where the companies go higher during each business cycle before they go into a decay phase (extended period of flat or negative returns) for a few years and then go up.
The Alternate Alpha Opportunity Here
In every such industry, there are niche players that tend to supply to these businesses(B2B) instead of supplying to the customers (B2C). Hence, when the business cycle goes up they grow in proxy and sales continue to grow backed by strong cash flows from cyclical businesses at the peak of this business cycle the other industry leaders move into expansion giving increased orders to such B2B players.
To put all of this into perspective- RHIM
The company RHI Magnesita has a 19% market share in the Indian Refractories market. Refractories are used in the production of cement and metals, implying all the major expansions taken up by cement & steel industries in India would increase the demand for refractories.
Currently, at 8565 Cr Market Capitalization, the company trades at a PEG of 1.36x with an ROE of 29.3%. Unlike most cyclical players the company is near debt free with 6% debt to equity and a 164x interest coverage.
"Indian steel companies will likely add 29 million tonnes capacity in the next 5 years"- To quote a business standard article
This approach is highly similar to that of investing in niche auto ancillary players that are smaller and have higher growth than their much larger automotive manufacturing clients.
--------
Reply to this and let us know how you would play the growth story in Indian steel manufacturing.
-------------------------
Invest in ideas like these via our Craving Alpha Core smallcase