Sep 25, 2012 03:57 PM IST | Source: CNBC-TV18

Hidden gems: Ashish Chugh's 2 long-term picks

Investment analyst Ashish Chugh is bullish on HCL Infosystems and Linc Pens. HCL Infosystems, he says, may see time correction from these levels, but not significant downside. He advises investors to accumulate Linc Pens between Rs 42 and Rs 48 level.

Investment analyst Ashish Chugh is bullish on HCL Infosystems and Linc Pens. HCL Infosystems, he says, may see time correction from these levels, but not significant downside. He advises investors to accumulate Linc Pens between Rs 42 and Rs 48 level.

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Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

Q: Why are you so bullish on HCL Infosystems?

A: I believe the stock price probably discounts the negatives in the company. HCL Infosystems is not going through the best of its time. The hardware business is facing a lot of margin pressure. Also, the distribution business is facing a lot of challenges because majority of the revenues in the distribution business comes from Nokia. With the declining market share of Nokia vis-à-vis other mobile players like Samsung and Apple, it is taking a toll on both the revenues and profitability of the company.

If you see FY12 financial performance, the revenues of the company have declined marginally to about Rs 10,800 crore from about Rs 11,400 crore. The profit has declined by about 60 percent to about Rs 70 crore. So, the affect is already visible on the financial.

If you see the various opportunities and possibilities, which are there in the company, I think the stock price probably discounts the negatives. First, we keep hearing about the rumours of Lenovo taking a stake in HCL. I think management has clarified that there is no truth to these rumours. But I would say that this is a possibility that cannot be totally ruled out because of various factors. One, hardware business is a low margin business for the company.

Secondly, the management has indicated that they do not want to put any fresh investments in the hardware business and also have categorically stated that they do not want an increase in the market share in the PC business at the cost of margins. So, I think the hardware or the PC business of the company, which is already there in separate subsidiary, there is a possibility that it may be sold to some other player. Since they already have working relationship with Lenovo, that’s the reason we keep hearing about these rumours. But that’s a possibility that cannot be totally ruled out.

The distribution business of the company is facing short-term challenges mainly on account of decreasing market share of Nokia. But the company is doing distribution for other players like Toshiba, Apple iPod. They have a tie-up with Hitachi and Kingston. So, a lot of potential exists. Since they already have the distribution network and also the service network, the possibility of the company adding new companies into the distribution chain is something that cannot be totally ruled out. Given the quality of the management and their potential, significant scale up can happen in this business.

Third, the service business of the company and the cloud computing business of the company is a business where a lot of potential exists. The company tying up with strategic partners for various service industry things is very much a possibility.

If you see the track record in terms of rewarding the shareholders, this company has been giving dividend of between 300-400 percent over the last five-six years. That is about Rs 6-8 per share with Rs 2 face value. This year also they gave a dividend of Rs 3. So, things are not going well for the company, but the stock price at Rs 40 probably discounts the fact that the next quarter is also not going to be good.

I do not see too much of downside from these levels. The stock is already discounting the negatives. It’s available at a five-year low at the price of Rs 40. So, we may see time correction from these levels, but not significant downside.

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Q: Why would you be bullish on Linc Pens?

A: In these kind of companies, when the price is low, the volumes are not traded, but this is not really a trading stock. It is fit for slow accumulation over the next three-six months. As far as the performance is concerned, the performance has not been very good in the short term, primarily on account of the higher raw material prices. Also, they did a lot of advertising spend. Ad expenses alone rose from about Rs 8.5 crore to around Rs 13 crore for FY12. There is an increase of about Rs 3.5-4 crore in the ad expense. That is the reason the profits are not visible, even though the top-line has been higher compared to last year.

They have recently given a 13.5% stake to Mitsubishi Pencil Company at a price of Rs 100. Some of the other strengths of the company are that this is amongst the top three stationary brands in the country. This company incidentally is the largest selling brand in various other countries like Myanmar, Bangladesh and Sri Lanka.

Company exports to over 40 countries. The company has been doing a lot in building the brand. They have been associated with four IPL teams. They have also been associated with Shahrukh Khan, and Katrina Kaif for brand endorsement. They have a very well established distribution network of about 47 channels partners and over 2,300 distributors.

The financials in terms of bottom-line have not been very good. That is precisely the reason you are getting the stock at the current price of Rs 45. So, the company is spending Rs 12-13 crore in brand building and they have been doing it for last many years, marketcap is just about Rs 65 crore.

The company has got negligible long-term debt. They do have debt in terms of working capital. But if you talk of long-term debt, it is just about Rs 1.5-2 crore. At the current price of Rs 45, this may not be really a trading stock because the impact cost maybe very high. But it may be a stock to accumulate between Rs 42 and Rs 48 level.

Disclosure: I and my family have investments in both stocks discussed.

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