Bullish on Sunil Hitech, Orient Ceramic: Mudar Patherya

Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: The first one you have picked out is Sunil Hitech, what is the story there?

A: It is very interesting. Sunil Hitech has had a very rough first two quarters of the current financial year. I think after which most stock pickers wrote the company off. One gets the feeling that the first two quarters are a bit of aberration for monsoonal reason, orders do not come or else don’t get executed. But they had a very interesting rebound in the third quarter. Whatever I have been able to pick up from the third quarter, it has been possible to extrapolate what might happen in the fourth quarter. That makes it very interesting.

For example, Sunil Hitech has a marketcap of close to Rs 130-120 crore at the moment. The company has done about Rs 220-225 crore of top-line for the third quarter, but with an earnings before interest, taxes, depreciation and amortization (EBITDA) margin of 14%. This gives us a perspective of how to plan ahead. Assuming the 14% EBITDA margin is more or less sacred, it is very interesting to extrapolate. In the current financial year, they should do a top-line of Rs 800 crore. In the last quarter, they ought to do a top-line of Rs 300 crore and 14% EBITDA margin. You are looking at an EBITDA level of nearly about Rs 40 to Rs 42 crore. Rs 40-42 crore compared to Rs 120 crore of market cap. This is not where the game ends.

I think you need to extrapolate towards what might happen in the next financial year. I would reckon that the next financial year would be Rs 900 to Rs 1,000 crore, if you are very optimistic about a Rs 1,000 crore. On a Rs 1,000 crore, an EBITDA margin of 14%, which I am assuming stays where it is, you got an EBITDA level of nearly Rs 140 crore. Rs 140 crore of EBITDA and a current day market cap of Rs 130 crore, it is a no brainer. You do not have to think twice and thrice. You don’t need to go through the numbers twice or thrice again. It is so simple that I do not think it requires too much of planning and too much of stock appraisal.

Q: What is fair value you think for Sunil Hitech then? If indeed Rs 140 crore of EBITDA is delivered next year or something close to it, where should the stock fair value lie?

A: I have been applying certain, I won’t say science but a gut feel. I have a certain thing which is EBITDA multiple. A lot of people have the price earnings multiple which is normally calculated on the post tax profit, I have a certain EBITDA multiple perspective. My EBITDA multiple perspective is EBITDA multiples of three-five are not buying levels. You got something which is sub one you buy it eyes closed. Even if it goes up to two, two is very reasonable, two is still buyable. At two, it will still be a projected market cap of Rs 280 crore. It is available at Rs 120-130 at the moment. If it is EBITDA multiple of two based on 2011-2012 results, you got the stock doubling from this level. If it goes up to a multiple of three-four, you can smile all the way to the bank.