Jul 18, 2007, 09.25 AM IST | Source: CNBC-TV18

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Hidden Gems Investment Analyst Ashish Chugh believes that the stock price of Stelco Strips does not look overpriced at the current level. He added the promoters may merge Stelco Strips and Stelco Ltd to grow the valuations of their shareholders.

Ashish Chugh

Investment Analyst & Author, Hidden Gems

Expertise : Equity - Fundamental

More about the Expert...

Hidden Gems Investment Analyst Ashish Chugh  believes that the stock price of  Stelco Strips does not look overpriced at the current price. He added the promoters may merge Stelco Strips and Stelco Ltd  to grow the valuations of their shareholders.

On Rama Paper Mills , Chugh said the newly installed power plant will help the company in reduction of power cost by about 25-30% and also add to the bottomline by about Rs 5 crore.

Excerpts from CNBC-TV18's exclusive interview with Ashish Chugh:

Q: Tell us the story of Stleco Srips and why do you like it?

A: Stelco Strips is a Punjab-based manufacturer of cold-rolled steel strips and sheets of mild steel. This company has got a total annual capacity of 1.16 lakh tonne per annum.

If you see the financials, for the past few years, this company has been increasing its sales revenues and profits consistently. The sales revenues, which stood at about Rs 45 crore for FY03, have increased to about Rs 192 crore. Similarly, PAT has also kept pace with the growing revenues and has increased from Rs 37 lakh to about Rs 4.58 crore over the same period.

This company is currently undertaking a capacity expansion, which will lead to an increase in capacity from 1.16 lakh to about 1.5 lakh tonne; this expansion is expected to go onstream by the end of this financial year.

If you see the financials for 2006-07, this company increased its sales revenue by about 21% to Rs 192 crore, PAT grew by about 27% to Rs 4.58 crore. EPS comes to about Rs 6; this stock currently trades at a price to earning ratio, or P/E, of about 6.

The promoters of Stelco Strips Ltd have another company in their fold called Stelco Ltd, which is into the manufacturing of higher value added products. Stelco Strips manufactures raw material for Stelco Ltd, who does higher value additions and makes spring steel strips and hardened steel strips, where the margins are much higher.

There could be a possibility that the promoters are planning to merge Stelco Ltd with the Stelco Strips Ltd. I would like to clarify here that there has been no confirmation from the company as regards to this merger. But to grow the valuations of their shareholders, I think this looks like a good way. Since Stelco Ltd is into the manufacturing of higher value added products, the margins would be much higher.

The financials of Stelco Ltd are not available in public domain, so the extent of re-rating of Stelco Strips Ltd would depend upon a number of factors, like the sales and profitability of Stelco Ltd and of course the merger ratio of Stelco Ltd with Stelco Strips Ltd.

In case the merger happens, there could be an upward re-rating of the stock, which is currently available at a price to earning ratio of 6 and having a market cap of about Rs 26 crore and a sales revenue of about Rs 200 crore. Definitely, the stock does not look overpriced at the current price. In case nothing happens, it may continue to languish at 30-35 levels. 

Q: You also like Rama Paper Mills , tell us the story behind it?

A: Rama Paper Mills is an Uttar Pradesh-based paper manufacturing company. The company also manufactures news print, writing and printing paper as well as duplex board, which is used for packaging. It has a total installed capacity of about 44,000 tonne per annum.

If you look at the financials for 2006-07, this company has done a sales revenue of about Rs 84 crore, which is around 10% higher than the sales for last year. The PAT has come down from Rs 5.5 crore to Rs 3.8 crore.

The profits lowered because the company was facing severe power disruptions in the last financial year, which led to significant reduction in the productivity. Also, in the January to March quarter, there was a breakdown in one of their manufacturing lines because of which the production was lower. During that period, the sales revenue was lower and the profit was substantially lower compared to that quarter of 2006.

Now, if you closely look at the balancesheet of the company, you will find a very interesting cost in it. The company did a revenue of about Rs 75 crore for FY06. The company's power cost alone was close to Rs 18 crore, which is roughly 25% of the total revenues of the company. If you go by the industry norms, it seems to be very high. In spite of such high power cost, this company was able to do an EPS of about Rs 7 in FY06. 

We do not have the balancesheet of  FY07 available as of now and that is why I am talking about FY06. Recently, this company was putting up a captive power plant of 6 MW capacity, which was operational in July. This will lead to about 25-30% reduction in the power cost for the company. It would mean an additional bottomline of about Rs 5 crore.

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