Check Out: Ashish Chugh's two midcap gems

911 Investors following Thirumalai Chem. Share this News with them.

0

Like this story, share it with millions of investors on M3

Check Out: Ashish Chugh's two midcap gems

Author of Hidden Gems and investment analyst Ashish Chugh, in an interview with CNBC-TV18’s managing editor Udayan Mukherjee gave his views on two stocks that he finds interesting. Below is a verbatim transcript. Also watch the accompanying videos for more.

Post your opinion here

 

0

Tweet

Share on Tumblr

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

Author of Hidden Gems and investment analyst Ashish Chugh, in an interview with CNBC-TV18's managing editor Udayan Mukherjee gave his views on two stocks that he finds interesting.

Below is a verbatim transcript. Also watch the accompanying videos for more.

Q: What is the story behind Thirumalai Chemicals which you have picked?

A: This is a Chennai based company that has their plant in Tamil Nadu. This company manufactures Phthalic Anhydride. It is the largest manufacturer of Phthalic Anhydride in the country with a total capacity of about 1.4 lakh tonne per annum and it is incidentally also one of the largest producers of Phthalic Anhydride in the world.

Phthalic Anhydride is a chemical which is used mainly by the paint industry. Besides paint, the other industry segments which use this chemical are dyes and chemical, other PVC and polyester resin. If you look at the background and financials of the company, it has been making healthy profits for the past 20 years, except for one-two years when it made a loss. It has been paying dividends for the past 20 years and the dividend payout ratios have been extremely generous.

In fact, if you look at past track record of the company, this company's payout ratio is to the extent of about 25-30% with dividends as high as 90-100% also in FY07-FY08. Then FY09 came where the company made a huge loss of about Rs 46 crore. The Rs 35 crore loss, was mainly on account of forex hedging which the company suffered and there was loss from operations of about Rs 9 crore.

The company has recouped from that loss in FY10 and it has posted a profit of about Rs 26 crore. Out of this Rs 26 crore, around Rs 9 crore is on account of forex gains, which means that profit from operations is about Rs 17 crore. In the first half of the current financial year, this company has made a turnover of close to Rs 400 crore which is up by about 45%. Profits have more or less been flat at about Rs 10 crore for half year.

This company has a 20 year track record of payment of dividend, EPS on trailing 12-month basis is about Rs 25 which means that at the current price of about Rs 125, the stock is available at a P/E multiple of about 5. Last year the company paid a dividend of 50% which means a dividend yield of around 4% at the current price.

This is an industry where China has been a net importer of Phthalic Anhydride, which the industry people say that at least till 2014-2015 the possibility of China dumping the chemical is not there and there are very few players in the industry because of high entry barriers on account of high capital cost, which are required for setting up the projects.

It recently expanded its capacity from 1.1 to 1.4 lakh tonne per annum, the benefits of which will start accruing to the company from this financial year. It is an extremely investor friendly company where dividend payouts have been extremely generous for the minority investors and it is available at extremely reasonable valuation of P/E multiple of just about 5-6.

The downside from these levels look restricted. Of course, the short-term concern is increasing oil price but given the position of the company, it maybe able to pass on the increased cost onto the customer. Of course the short-term concern is there, but the stock price has been hammered down because of this concern and at about Rs 120-125 this stock warrants a buy.

Q: The other stock that you have picked today is Liberty Shoes , what kind of levels can be justified on this one?

A: As far as the financial performance is concerned, for the past four years it has been lackluster but the stock price has also been lackluster for the past six months. If you see the stock price consolidating in the range of about Rs 100-125, we have seen a bounce in the market and many stocks have doubled. Inspite of that, this stock has stagnated at these levels for a long time. This is mainly because there has practically been no growth in revenues or profitability of the company for the past four years.

This company has got six manufacturing plants, it is a very well-known brand name and it has got a number of brands which are well recognized like Force 10 and Cooler and about a dozen others which when you say Liberty, everybody recognizes these brands. Off late, what we have seen is that given India's strong consumption story, the number of companies which have good visibility, good brand, these companies are getting rerated. Stocks like VIP Industries, Hawkins Cooker and also TTK Prestige, have moved up.

Of course this has to be backed by the financial performance. Without financial performance, the market will not rerate you, but off late, we have been hearing a number of aggressive steps being taken by management, they are talking about opening a 100 more Liberty exclusive stores by March 2011. They currently have about 350 exclusive stores and the product is sold through almost 60,000 retail outlets.

The fact that the management has now become aggressive, they are talking about opening more stores, they are talking about doubling the production levels from about 50,000 to one lakh pairs a day in the next three-years. If it is backed by the financial performance of the company, we may see rerating of the stock from these levels of about Rs 110-115.

I don't see investors losing too much from these levels. Marketcap at current price is close to Rs 200 crore. Given the brand value the company has, the marketcap at Rs 200 crore looks extremely attractive for investment. The caveat here is the rerating will happen only when signs of better financial performance start emerging from the company. Till that time, it may be a stock to accumulate at about Rs 110-115 levels.

Disclosure: I have got investments in the stock of Thirumalai Chemicals. I do not hold Liberty Shoes.