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Dipen Sheth , Head of Research at Wealth Management Advisory Services , said that he liked Diamond Cables as they came back into viability, by means of a one-time settlement, and they made friends with an international investor called ClearWater Capital, which helped them to infuse capital. 

Sheth also likes Alphageo as this company also has a good management and it always invested in things that futuristic.

Excerpts from CNBC-TV18’s exclusive interview with Dipen Sheth:

Q: You like Diamond Cables . Can you tell us why would you buy the stock?

A: I have already bought the Diamond Cables stock. I like the blokes who are running the business. They are hard working people and they were under tremendous pressure, about two years ago, when the company was virtually sinking.

It was sinking under a mountain of debt and had very little production to show for itself. So, it obviously couldn’t service that debt out of its current operation.

But the people who were running it, S N Bhatnagar and his son Amit Bhatnagar, clawed back into viability, by means of a profitable or opportunistic one-time settlement, they could negotiate with their bankers. They got about Rs 90 crores let off in that one-time settlement.

At the same time, they had to infuse more money to keep the business going and they made friends with an international investor called ClearWater Capital, who specializes in this kind of a situation.

So, ClearWater and the Bhatnagars put their heads together and brought this company back from the brink of disaster. Since, they have done fairly well for themselves and have delivered on their promise that they had committed at that point of time.

We saw it when it moved up from Rs 40-60-70 levels and that is when we bought it first for our few clients. And over the next year or so, till about January this year, the stock had doubled from those levels. So, most of my investors and people that I advise, sold off and so did I.

In another two-three months, they made more announcements of acquiring another small transformer capacity. Diamond is a manufacturer of power conductors.

But when they announced this takeover of Western Transformer, in their hometown of Baroda in Gujarat, I again started getting the vibes that something was seriously happening in this company.

They followed it up with the takeover of Apex Electricals, a similarly sunk transformer manufacturer in Baroda, who was once very respectable.

Around 7,500 MVA is a huge capacity and that gives them a revenue potential. With 7,500 MVA capacity, you can go up to about Rs 500-700-800 crores, at full capacity. The company is doing about Rs 70-80 crores quarterly run-rate on revenues, even after its takeover of Western Transformer. 

So, that itself was a value addition and they were again settling Rs 105 crores of outstanding liabilities at Apex Electrical, for approximately Rs 10 crores. So, that was another great one-time settlement.

They have got into the habit of getting into one-time settlements, at a very good rate, but they are reviving dead horses and that is a great thing.

Apart from the opportunistic revival and one-time value that comes on their balance sheet, they have also got this capability to turn around and run great operations. I have met the management and I am convinced. I think the stock is more than Rs 300 now.

Q: What do you like about Alphageo ?

A:  Alphageo has a very good management. What is important in the midcap space is that you have to like the people running the business and have faith in them.

I have been interacting with Dinesh Reddy, the person who runs the company from about 2.5 years ago, when the company moved up from Rs 60-70 to about Rs 100,

This company spent Rs 20 crores in gross block, at that point of time in acquiring equipment that nobody, in this country, knew how to run at that point of time. So, they were investing on something that was clearly futuristic. You have NELP V and NELP VI and the new oil fields that had been opened up for exploration. They were clearly investing in the future and there was very little to show on the table for what they had done in the past, but it was a 40-50% EBITDA business.

I am afraid, I personally sold it too soon and I have not forgiven myself for that.

But the growth in this space and the quality of the management is what attracted me to them. This is another stock, which has crossed the Rs 300 limit and they are at about Rs 350 now. The jury is out on their numbers, but they should do at least Rs 40 earnings in ‘09, so they are still not too costly.

Disclosure:

I and my clients hold positions in all the stocks discussed.