Ashish Chugh cherry picks Bombay Burmah, Nucleus Software

Below is the edited transcript of Chugh’s interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying video.

On Bombay Burmah

Bombay Burmah has seen two major transactions in a matter of last three months which probably have gone unnoticed in the market. It has sold its non-core businesses- the laminate division for a total consideration of about Rs 100 crore. Also, they have sold the specialised spring division to NSK Spring for Rs 180 crore. These two transactions will bring in cash of about Rs 280 crore in their books. Given the market cap of the company of about Rs 620-625 crore, this cash of Rs 280 crore is significant.

This is a 150 year old company. It is probably the oldest listed company on the stock exchanges. It is a diversified company. Even after sale of these two divisions it still operates in tea and coffee plantation, auto electricals, dental products and real estate.

As far as tea and coffee are concerned, they have got 2,800 hectares of plantations spread across Tamil Nadu, Tanzania and coffee plantations in Coorg. This company also holds investment in group companies. Incidentally, Britannia Industries Ltd is a 51% subsidiary of Bombay Burmah through its subsidiaries and step down subsidiaries. This company also holds about 51% stake in Bombay Dyeing . The valuation of these two investments is substantial.

Their real estate division is developing properties at KanjurMarg in Mumbai and Coimbatore. Given the market cap of about Rs 625 crore, recent cash inflow of about Rs 280 crore and the fact that it is a 150 year old company the assets in the books would be at historical cost. So there is great value in the company.

This company did an EPS of about Rs 40 in the last financial year and paid a dividend of 70%. The dividend yield is just about 1.5-2%. But there is potential for bigger profits from the core business of tea and coffee in which the company wants to concentrate now. Also, there is potential for untangling of complex structure in the company as of now, also unlocking of some of the investments.

At the current price this stock provides margin of safety. There is value in company but I would like to caution that this is a slightly illiquid stock. It may have gone up today but once it settles down below Rs 450, investors can then buy in a staggered manner.

There is no hurry to buy because given the state of the market I don’t expect the company to go up substantially in a short period of time. So this will give opportunities to accumulate quantities at your price. Just keep a watch on this company and keep on accumulating the stock at every decline.

On Nucleus Software

Nucleus Software currently trades at about Rs 68. At the current price the market cap of the company is about Rs 225 crore. This is a totally debt free company. If one looks at the latest balance sheet of the company, it had investments mostly in debt and liquid mutual funds of about Rs 126 crore.

It had cash and fixed deposits of about Rs 62 crore which makes cash and cash equivalent of about Rs 188 crore. The business of this company is going at an enterprise value of less than Rs 40 crore.

This company caters to banking and financial services sector. It claims that its product FinnOne is world’s number one selling lending software. Given its product portfolio, Rs 40 crore enterprise value is too low. It has got clients across the globe.

It derives most of its business from Far East and South East Asia. Besides that the company has presence in UAE, Africa and also small presence in Europe and US. US contributes just about 1.5-2% of the total revenues but major revenue comes from Japan, South East and Far East.

This company has got facilities in Noida. They have just started another facility in Jaipur. For FY11 sales were about Rs 270 crore, PAT was about Rs 26.3 crore which was lower than FY10 and EPS was Rs 8. In the first half of the current financial year it has managed to maintain sales which were at about Rs 138 crore. But they have seen an improvement in PAT mainly because of rupee depreciation which happened recently. PAT is up by about 15% to Rs 16.5 crore.

Now in an era of slowdown, we have a company which is able to maintain sales and show an increase in profits. The company has been getting new orders and has been adding new clients. They have opened up a new facility in Jaipur and are hiring aggressively for this facility.

So here is a company which has got high entry barriers. They have created proprietary products which are difficult to replicate in a short period of time. It is a totally debt free company. The best thing about this company is that it is a well managed. At current valuations it is available at extremely attractive valuations.

Disclosure: My family and I have small investments in Bombay Burmah.