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Ashish Chugh , Investment Analyst and Author-Hidden Gems talks about two of his midcap picks - Natco Pharma and  Interlink Petroleum.

 

On Natco Pharma :

 

Natco Pharma is the leader in the oncology segment and the market leader in sales. The management expects 20% growth in the oncology segment in the next 2-3 years. It is increasing its presence in the retail pharma space in the US and has acquired three stores in the US and are looking for more acquisitions. The company's valuation are attractive and are trading at a PE of 5.2 time. It's FY08 sales was seen at Rs 330 crore and profit at Rs 42 cr.

 

On Interlink Petroleum :

Interlink Petroleum was allotted 2 blocks in the mid 90s but these fields were not explored due to shortage of funds. However, the company has now seen a change in the promoter group lately and it has allotted Rs 1.2 crore preference shares to Jit Sun Investments. Jitsun is owned by Singapore based Ezra Holdings. Revenues may take a while to flow in and investors need to wait for at least 3 years and they should buy the share at less than Rs 30 per share.

 

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

 

Q: Do you think that Natco Pharma is a very undervalued stock?

 

A: Yes, Natco Pharma is a pharma company based in Hyderabad. This company is mainly into the oncology business and this company is ranked number one in India in the oncology segment. The management expects to grow the oncology business by about 20% every year over the next three years.

 

There are a few interesting developments taking place in this company. This company is increasing its presence in the retail pharma space in the US through acquisition of retail pharma stores. They have already acquired three stores and they are scouting for more acquisitions in this space in the US.

 

The company's major strength is research and they are currently doing clinical trials for an oncology drug they developed. Phase I of the clinical trials have already begun. Commercialization of this drug will lead to substantial benefit both for the company and its shareholders.

 

Natco tied up with Mylan Inc for worldwide sales of Glatiramer Acetate. Tava Pharmaceuticals of Israel also makes and markets this drug. This drug is a USD 3 billion drug and Teva currently has a monopoly position in this drug. Mylan will conduct the clinical trials and will incur all the expenditure involved in this clinical trial. They will also obtain regulatory approvals and handle the registration of this drug in the US.

 

It may so happen that since this drug is going to threaten the monopoly of Teva, they may try to maybe delay the launch or file a suit against Natco Pharma, which may lead to a slight delay but whenever the drug is commercialized, it would be a big leap forward for Natco Pharma.

 

This company had sales revenues of about 330 crore in FY08. They had a profit after tax or PAT of about 42 crore, which means an EPS of close to Rs 14. At the current price of Rs 75, this stock trades at a price to earnings ratio less than 6.

 

The company holds a land bank of close to 300 acres, which is close to the new Hyderabad airport. This land bank alone is valued at between 250 and 300 crore, which is more than the current marketcap of this company, which stands at about 200 crore.

 

The company is available at reasonable valuations and is growing through the inorganic route by acquiring retail pharma stores in the US. It may take two-three years for the drug sales to materialize but as and when it materializes, it will position Natco on a different platform altogether. So at this price I think the stock merits investment.

 

Q: Your other stock today is from a different sector, Interlink Petroleum. Why do you like this story?

 

A: Before I talk about Interlink, I would like to give a cautionary statement this stock trades in a Z Group of Bombay Stock Exchange (BSE) and investors should keep that in mind before they make investment in this stock.

 

Interlink Petroleum is an oil company based in Gujarat. This company was allotted two-fields in the mid-90s. These are Modhera Oil Field and Baola Gas Field. The previous promoters of the company were unable to exploit these fields commercially due to paucity of funds. Both these fields are located in the Cambay Basin and both are proven fields.

 

This company has recently seen a change in management and has allotted about 1.2 crore shares to a Singapore company called Jit Sun Investments. Jit Sun Investments is owned by Ezra Holdings Limited. Ezra Holdings is listed in the Singapore Stock Exchange. They are into the oil and gas sector but they provide support services in the oil and gas sector. They are into offshore support services and marine services.

 

Ezra Holdings has revenues of about 220 million Singapore dollars. They made a Profit After Tax (PAT) of about 100 million Singapore dollars and command a marketcap of about 1,100 million Singapore dollars. They came out with an IPO in August 2003 and the current stock price is about 15-times the IPO price. So this company in terms of its revenues and profitability as well as in terms of the stock price has seen substantial growth over the last three-four years.

 

Interlink Petroleum, after infusion of funds by Ezra Holdings will be able to commercially exploit the fields that have not been exploited till date. We may also see commercial production of oil and gas from these two fields. Ezra Holdings may use Interlink Petroleum as a vehicle for increasing their commitment and increasing their business in India. Ezra Holdings has appointed senior people from the oil and gas industry, including the Former Chairman and Managing Director of Oil and Natural Gas Corporation (ONGC) Mr. B C Bora on its Board.

 

So all in all with this current marketcap of Rs 70 crore, the stock may look overpriced, given the revenue of the company is zero. But the way things are shaping up in this company, they will be able to now exploit their fields. The stock has seen a run up over the last week or ten-days. Rs 30 would be a good level to maybe enter into this stock.

 

Disclosures

 

I have a vested interest in both the companies.