A cigar butt (cheap stock): SPL Industries

I bought shares of SPL Industries (@ 42.5) yesterday. It is Delhi-based medium-sized garment manufacturer with an annual turnover of around Rs.250 crore. See the link for the company's latest year financials. For more information about the company click here.

Reasons for buying the scrip:

1).P/E < 10 times
2).P/B < 1 times
3).EV/EBDITA < 7 times
4).Debt-to-equity < 1 times
5).Stable growth
6).Healthy margins
7).Interest cover > 3 times.

Downside risk: Not much at current prices.

Earnings shock: Likely in a scenario where raw materials witness a sharp jump (unlikely in the near term). The main raw material for the company is yarns, production capacity of which is rising at a rapid pace. Most of the yarn companies in India are expanding there capacities by leaps & bounds, in anticipation of higher demand from domestic garments companies in the post-MFA era.

Upside: 20-30% with no growth from current levels. Could he higher, if the company is able to maintain the growth of the last two quarters.

Conclusion: SPL is a classic "cigar butt" (in Charlie Munger's words), it is trading at a significantly modest valuations at current prices vis-a-vis other garment manufacturers like Gokaldas Exports, Zodiac Clothing, etc. I think even if the company were to not record any growth over the next few years, it should still be trading at a 9-10 times its earnings, giving an upside of around 20%+.