Ashish Chugh's picks: Surya Roshni & Ansal Properties

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Surya Roshni BSE | NSE 31/05/12 Are Mutual Funds betting on Surya Roshni? Other Stocks in this news Ansal Properties & Infrastructure | Unitech | DLF |

Ashish Chugh, investment analyst and author of Hidden Gems joins CNBC-TV18 to cherry-pick some midcaps that could save your portfolio in these uncertain times. He picks Surya Roshni for its strong business fundamentals and valuation. He says that the stock is possibly bottiming out at Rs 60 at which it trades now.

Chugh picks Ansal Properties as a contrarian buy, especially since the stock is trading at its 52-week as well as five-year low at Rs 27-28. He sees it as a value buy for high-risk investors. He cautions that this stock could experience another fall, but nothing more than 5-10%.

On Surya Roshni

Till about a year ago, the promoters of the company were holding just 29% stake in the company. Today, their shareholding stands at about 62%. What has happened is that promoters in the first tranche converted warrants at Rs 59, thereby, taking their shareholding up from 29% to 39%. Thereafter, they converted warrants at Rs 83 and subsequently came out with an open offer at Rs 111. By virtue of all these things, the promoter shareholding has gone up to 62%.

Even though the open offer was for 20%, the shares tendered in the open offer by just about 7% which shows the optimism of the investors in the future of the company.

After six months the stock is down roughly 50% from a high of about Rs 125 which it touched up when the open offer was on, and currently trades at about Rs 60-62.

Talking about business, Surya Roshni has got two divisions, lighting division and steel pipes division. Though lighting division contributes roughly 35% to the revenues of the company, the profitability it enjoys is much more. It has got two plants and makes GLS lamps, CFL lamps, metal halides and other tube lights and other electrical lighting products. This company claims to be the only one which has a 100% backward integration as far as lighting products are concerned.

The steel division of Surya Roshni manufactures various kinds of pipes starting from GI pipes to ERW pipes. A 54% subsidiary of the company has just set up a plant in Gujarat for manufacture of spiral pipes, which is going to add to the revenues and profitability of the company in the times to come.

Talking about financials, FY11 sales were about Rs 2400 crore with a profit after tax of about Rs 67 crore. EPS was close to Rs 15, so at the current price of about Rs 60-62, this stock trades at PE multiple of about four times.

In Q1FY12, sales are higher by about 15% to about Rs 590 crore, and profit after tax is also higher by about 15% to close to Rs 10 crore. The company provides very high depreciation and cash profit for the company for FY11 was about Rs 120 crore. Market cap of the company at current price is about Rs 270 crore. So you have a business which is available at roughly 2.5 years of its cash flow, market cap-to-cash profit is less than 2.5. The company enjoys very high sales-to-market cap of more than 10, and it has got an uninterrupted 20-year track record of payment of dividend.

So you have a business which is available at very attractive valuations at a steep discount to the price which the promoters have paid to increase their stake in the business. From a level of Rs 60, I don't see too much of downside going forward in this stock.

On Ansal Properties

This is a contrarian buy from a sector which is currently out of favour, from a sector which has virtually been written off by most investors. That is the reason you are getting this stock not just close to its 52-week low, but very close to its five-year low.

The reasons are many. One is that the interest rates are almost at their peak, which is hurting not just home sales, but also hurting the debt servicing capacity of the companies. The other thing is that there is a lack of transparency and corporate governance in the sector as a whole. The other part is that most real estate companies are carrying huge inventories as on date, and most of them are finding it difficult to sell those.

Coming to Ansal Properties, this is a 40-year old company almost as old as Unitech and DLF . It has been credited with developing more than 3,000 acres of land in Gurgaon alone, leave aside other developments. The company has got current land bank of about more than 7,000 acres out of which 3,500 acres is in Lucknow, and Megapolis, Greater Noida is about 2,500 acres. Ansal is doing a 200 acre township in Gurgaon and currently has got about 19 townships under development.

If we look at the financials of the company, FY11 sales were about Rs 1,300 crore with a profit after tax of Rs 108 crore and EPS was about Rs 7.50. In Q1 FY12 sales are about Rs 300 crore which is up by 16%. Profit after tax is down by close to 40% to about Rs 22 crore.

The heartening fact is that in the June quarter the company has booked sales of about 8.5 million square feet which incidentally is the highest sales booked by the company in any quarter.

Also, I think the negatives with respect to the sector maybe fully priced-in in the stock prices. Any indication by RBI to end the interest rate increase cycle may lead to a sharp bounce back in the prices of many of the stocks in the sector. That apart, this company has got debt of about Rs 1500-1600 crore which is not, I would say very low, but it's at manageable levels. It is not as high as what many other real estate companies are carrying which are much smaller in size compared to Ansal Properties.

The stock currently trades at about Rs 27-28, while the 52-week high for the stock is about Rs 97 and low is Rs 26. On a five-year basis, this company had touched a price of about Rs 550 and the low was about Rs 21. So at current price, it is available very low to its five-year and 52-week low.

I don't see too much downside from these levels. I think the negatives seem already priced in. In case any positive announcements with regard to the end of rate increase cycle come, it may lead to a sharp bounce back in the stock price of the stock. So it is for the high-risk investor and I think from Rs 27-28, another fall, maybe, about 5-10% is the maximum which I expect in the stock.

The good part is that the promoters have been increasing their stake in the company through market purchases. Between March and June, they have increased their stake by about 1.3%, and even after June, you can see from the various disclosures made to the stock exchanges that they are still buying from the market. Therefore, these things make us positive on the stock of Ansal Properties.

Disclosure: Me or my family do not hold any stock of Surya Roshni, but we do have some investments in Ansal Properties.