Angel Broking bets on multibaggers Hikal and Finolex Cables

Below is an edited transcript of his multibagger ideas. Watch the accompanying video for more.

Hikal

This is a very low profile company but the promoters are very high profile. Baba Kalyani of the Kalyani Group holds about 34% stake and the Hiremath family which is related to the Kalyani Family also owns about 34% stake. So the promoters hold about 69% stake in this company. But it's a very low profile company as we rarely talk about it in the print or the electronic media. This company, however, looks very interesting.

About 15 months back the stock was quoting at around Rs 475 and it has corrected about 50%. This correction has been on very thin volumes. It's a very ill-liquid counter which is why on very thin volumes the stocks normally tend to crash. The company is into pharma business which controls about 65% of their topline. It is also into agrochemical business which contributes the remaining 35%. It caters to very good clients with which it does contract manufacturing for players like Pfizer and Phoenix in the pharma business and Bayer CropScience in the agro chemical business. Both the businesses are doing reasonably okay.

The company went through a bad time last year when some of its clients had to do destocking on their inventory which is why the company’s turnover dipped. But things are back to normal and the company is expecting reasonable growth going forward from here.

Some interesting things have happened; one is that they have recently launched two products, pharma intermediaries and they expect these products to do reasonably well and contribute for three months in the current year but the full impact of these two products will be realized in FY12-13. The company is also likely to get orated by a Japanese regulatory authority and they are expecting this to get completed by March. So once that is completed the company is expecting decent revenue from that front as well.

So net-net if you see FY12-13 would be a very interesting year for this company when we are expecting about Rs 720 crore of topline resulting in an EPS of about 33. Now when we worked out the EPS of 33 we have not included the benefit of the depreciating rupee because 75% of the company’s turnover comes from export. So it certainly benefitted but we have not considered while calculating the EPS of 33.

Now a 33 EPS company like Hikal with a good promoter holding should clear at least Rs 500. The stock is at about Rs 230. Even on a marketcap to sales basis if you see many of the agro chemical and pharma companies are trading at 2 times their sales. This company is trading at 0.5 times the sales. So, on all parameters this company looks very interesting. We would see a 100% upside in the next 24 months which is the bare minimum we expect. We also own about 45,000 shares of this company in our PMS.

Finolex Cables

This was once a blue chip company. Right now it has been beaten as if it's any Tom Dick and Harry company, it was termed blue chip until 2002 but of late it has lost its shine. I think that those days are not far off when it is sure to regain its lost glory. Between this year from the public issue until 2002 this company issued four bonuses in 1:1 ratio and two buy backs. It has been a very good dividend payer as well. Now this company is into electrical cables which are about 60-65% of its turnover. About 15% comes from communication cable and the remaining 15% comes from copper rods.

The two sectors to which it caters too is going through immense pressure whether it is the power sector because of it coming to a complete halt and the telecom space because of what is happening in the industry with many players reluctant to put more money into 3G services in tier 2 and tier 3 cities. That is the reason why the stock has come down. Two years ago, the stock was quoting at about Rs 65 and today it is quoting at about Rs 30. The stock had gone down to Rs 20 levels and after which we saw significant buying by promoters. Their investment company Orbit Electrical’s has been regularly buying the shares of Finolex Cables from the market.

Over the past four months, they have accumulated almost 10 lakh shares at an average price of about Rs 30-33. At this price, the promoters themselves are buying because they find value in the story at this point of time. This is basically a matter of time. In the next 12-18 months we’ll see a complete turnaround in both sectors and Finolex Cables should be back in action.

The interesting thing is that the company also owns 33% stake in Finolex Industries. We worked out the actual value of Finolex Industries. The stock is at Rs 46 but if you consider the capacity it has 260,000 metric tonne of PVC, 150,000 tonne of PVC pipes, a 33 megawatt plant and they also have 70 acres of land at Chinchwad which is worth about Rs 350 crore.

So if you work out the actual value of Finolex Industries, that itself works to about Rs 85 per share after taking off that debt. Finolex Cables owns 33% stake in that company. So the value of that 33% stake works out to be about Rs 330 crore, where the current marketcap of Finolex Cables itself is about Rs 460 crore. If you take out this Rs 330 crore of investment from Rs 460 crore of marketcap you are getting a Rs 2,000 crore company for just about Rs 130-140 crore.

They also have a joint venture with Hitachi Cable and Sumitomo Electrical Cables of Japan in the form of a new company called Finolex J-Power Systems is going to get operational in the next one-two months. That is into high voltage extra voltage cables which is going to be a very significant revenue booster to its topline. So on parameters of Rs 30 the stock has a very limited downside and the upside could be as high as 100% in two years. We own about 6-7 lakh shares of this company in our PMS.