Ashish Chugh bullish on VBC Ferro, Deccan Gold

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Ashish Chugh, Investment Analyst and Author, Hidden Gems, is bullish on VBC Ferro Alloy and Deccan Gold Mine . VBC, he said, has invested close to Rs 135 crore in a gas power project called Konaseema Gas Power Company. Deccan Gold expects to get approvals for mining license for a few blocks and should start producing in the third or fourth quarter of FY10, he added.

 

Here is a verbatim transcript of the exclusive interview with Ashish Chugh on CNBC-TV18. Also watch the accompanying video.

 

Q: What is the story with VBC Ferro Alloy and why do you like it?

 

A: VBC Ferro Alloy has got a manufacturing plant located in the Medak district of Andhra Pradesh. This company manufactures ferro chrome, ferro silicon and silicon manganese, which are used in the steel industry. This plant is located on 80 acres of land, which is situated at Medak district of Andhra Pradesh. Now if you take a look at the financials of this company for the first half of the current financial year, sales are up by 80% to about Rs 52 crore and Profit After Tax (PAT) is up by about 82% to around Rs 3.6 crore. Equity of this company is just about Rs 4.2 crore.

 

The interesting part in this company is that this company has got investment of 30%; they have invested close to Rs 135 crore in a gas power project called Konaseema Gas Power Company. Konaseema is setting up a 445 megawatts natural power gas base power project in Andhra Pradesh. The project has been commissioned, but it is yet to start operations because of non-availability of natural gas. There has been a delay in the availability of natural gas and the management expects to get the gas in the month of March 2009. Once they get the gas, the plant will start operations.

 

VBC has got a very small equity of 4.2 crore. At the current price, the market capitalisation of the company is less than Rs 40 crore. The valuation of Rs 40 crore, if you include debt too, most of its debt is in the form of working capital, which is secured against the inventory of the company and they have got a very little by way of long-term loans from the financial institutions.

 

Basically for a company with a valuation of about Rs 50-55 crore, if we compare this 445 megawatts power project with the listed peer group, most of the peer group companies with similar capacities trade at a marketcap of few thousand crore. They range between Rs 2,000-5,000 crore, so as against that this company is available for valuation of about Rs 50-55 crore, looks grossly undervalued. The main risk in this company is the availability of natural gas, in case of a delay in availability; the stock price can take off. But, the negative on account of delay in availability of gas is already factored in the current stock price, and any positive news coming on that front can take the stock much higher from the current levels.

 

Q: Deccan Gold is the other hidden gem you have picked today?

 

A: Deccan Gold is the only listed company and it is the only first private sector company involved in gold exploration. This company has been promoted by Australian investors, who are involved in similar business in Australia. This company has got a large portfolio of exploration blocks, which are located mainly in the states of Andhra Pradesh, Kerala, Karnataka and Rajasthan. This company has got one of the most prospective blocks in the country in gold exploration.

 

As of now, the company has got no revenues because of the fact that they have applied for mining license for few blocks, but they are yet to get the approval from the Central Government and State Government for mining these blocks. The management expects to get the approvals and start producing in the third or fourth quarter of FY10. They expect to do about 4 tonnes of gold every year and 4 tonnes of gold, if multiplied with the gold price of Rs 10,000 per 10 grams, this translates into the revenue of Rs 400 crore. If we try to be conservative and say that they are able to do only 50% of what they are talking about, this would translates into Rs 200 crore revenues and gold exploration it is a high margin business, something like oil exploration, where initial expenses may be high but the margins can be pretty good once they are able to start mining gold. So at a market capitalisation of Rs 80 crore, I think the downside from these levels looks to be very less. Even though, I would recommend that the current price of Deccan Gold is about Rs 14-15, investors can choose to make a staggered purchase, which could be spread over the next 3-6 months at the price of between Rs 10-15.

 

In the case of the unusual movement in the stock like the one we saw last year, when the stock went up from Rs 15 to Rs 150. Risk management is very important because this is a high risk stock, high risk because the uncertainty which is attached with the kind of business it is involved in. But at the same time the returns in case every thing goes well for the company can also be very good.

 

Disclosure: I would have investment in Deccan Gold Mine and VBC Ferro Alloy.