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Apr 20, 2007, 12.09 PM IST | Source: CNBC-TV18

Bihar Tubes extremely attractive for investment: Chugh

Investment Analyst, Ashish Chugh is extremely positive on Bihar Tubes; and on Blue Dart, despite reports in the media that the government is looking at restricting holdings in courier companies to below 49%.

On government policy.

Ashish Chugh

Investment Analyst

Investment Analyst, Ashish Chugh is extremely positive on Bihar Tubes; and on Blue Dart, despite reports in the media that the government is looking at restricting holdings in courier companies to below 49%.

Excerpts from CNBC – TV18’s exclusive interview with Ashish Chugh:

Q: Bihar Tubes is a stock that you like, why?

A: Bihar Tubes is a company manufacturing steel tubes and this company manufactures different types of steel tubes for different application areas.

This includes galvanized steel tubes, pre-galvanized pipes, black pipes and also structural pipes which are used in the construction industry. This company has got its manufacturing operations located at Sikanderabad in UP.

This company has been logging on good growth rate over the past four years - from a turnover of close to about Rs 65 crores in 2002-2003, this company achieved a turnover of close to Rs 165 crore for the last financial year, which is 2005-2006 with a corresponding increase in profitability.

For the first nine months of the current financial year, this company has already achieved revenues of close to Rs 162 crores which is similar to what it achieved for the full year 2005-2006 and has made a net profit after tax of about Rs 3.3 crores.

For full year, we expect the company to achieve sales of close to Rs 220 crores and profit after tax could be around Rs 6 crores which would result in an EPS of about Rs 19-20.

Now this company has lately been focusing on higher value addition, which has seen substantial increase in the company’s margins. And through internal extensive in-house R&D, the company has managed to lower down some process costs and also lower the costs of raw material which will lead to increased margins in the future also.

This company has undertaken a capacity expansion at its Sikanderabad unit and they are also putting up a new tube mill at Khopoli in Maharashtra.

Besides that, the company is also getting into backward integration.

This company supplies mainly to the institutional and corporate segment directly. Around 45-50% of its total sales go directly to the institutional and corporate customers.

Besides supplying to various government departments, this company also supplies to various construction companies like Parsvnath , Simplex , L&T and Omax , and also to some other corporates like Kirby Building Systems, Suzlon Energy and Triveni Engineering .

This stock is currently trading at a price to earning ratio of 7 based upon 2006-2007 earnings. The company has recently announced a bonus in the ratio of 1:1. They have yet to come out with a record date for entitlement of bonus for the shareholders.

So at current price of about Rs 130-135, this stock trades at price to earnings ratio of 7. Given their expansion projects and backward integration, one can look to substantially higher topline and profitability in the years to come.

So at a cum bonus price of about Rs 130-135 this stock looks attractive for investment.

Q: The other stock that you like is Blue Dart ; tell us a story there?

A: Blue Dart is 81% subsidiary of the global logistic major DHL Express. This company has created substantial infrastructure for its business operations, this includes warehouses at about 40 locations all across the country.

This company has created ground support in the form of more then 3,500 vehicles and also has air support in the form of seven aircrafts.

The company’s network comprises more then 14,000 locations in India and through its sales alliance with DHL covers more then 220 countries worldwide.

This company is undertaking an expansion project and its opening warehouses at more then 50 locations, which will take the total number of warehouses close to 80-90. They have plans to do in the current financial year.

Financially the company ends in the month of December, and for the year ended December 06, this company has been able to achieve sales of about Rs 70 crore ad a profit after tax of close to Rs 50 crores which results in an EPS of about Rs 21.50.

If you compare this company with the peer group - even though this company is the largest in the sector and has a highest market share and has created infrastructure which is much bigger then the other players in the industry; it still trades at much lower valuations compared to some of the new listings which have happened in the logistic space and some of the other companies which are in this area.

If you compare the company in various parameters including size of a presence and sales revenue, the market cap of this company looks much lower than the peer group.

At the same time, the promoters of Blue Dart that is DHL Express are interested in buying back the public share holding and de-list the company.

So on the one hand, you have a company which trades at substantial discount to the peer group, and on the other, you have the promoters who are interested in buying back the entire shareholding from the public.

The intent of the promoter may not lead to a substantial fall in the share price in case the market were to turn negative.

So at the current price of about Rs 450, this stock looks undervalued with a market cap of Rs 1,100 crores, and with the fact that logistic industry has got a good future given India’s economic development.

So, at Rs 450 this is a quality midcap stock offering an attractive investment opportunity at the current price.

Q: There has been some talk in the media that maybe the government is looking at restricting holdings in courier companies to below 49%. How would that play out for Blue Dart if indeed DHL were to be ask to lower it from 81% to 49%?

A: I read this thing in the newspaper yesterday.

I think there are going to be representations from the industry because we are not living in late 70s, where the government could have ask the multinationals to pack up and go.

The thing is that once these companies have invested substantial amount of money, time and energy in setting up infrastructures; I believe it would be unfair on the part of the government to ask them to give control to somebody else.

So I do not know how it will pan out on medium to long-term, but even if we take a worst-case scenario that this company has to offer a substantial, the majority stake to somebody else; this being a public listed company, even at 49% there is no takeover threat as such.

And if they have to offload a part of their shareholding to an outside shareholders definitely it would not be at this valuation.

So in any case, the shareholders of this company are not going to lose.

The only thing is that the market does not like uncertainty and the stock price may remain depressed as long as the uncertainty remains. But over a medium to long-term, even if the policy of the government becomes a law, it will be a threat to Blue Dart at the current price.

Disclosures:

Bihar Tubes - my family or me would have and investment in this company. Blue Dart - no positions.     

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