Moneycontrol » News » Markets » Expert & FII Outlook

Is it time to eye asbestos cement sheets sector?

Published on Wed, Sep 24, 2008 at 15:11 | Source : CNBC-TV18

Updated at Wed, Sep 24, 2008 at 23:59

1804 Investors following Visaka Ind. Share this News with them.

Share on Tumblr

Excerpts from Bazaar on CNBC-TV18 Watch the full show »

ALSO READ

Nifty

BSE | NSE 01/06/12

Are Mutual Funds betting on Nifty?

Other Stocks in this news

Jay Ushin |

Midcaps have been down and out these last few weeks and they are underperforming largecap peers but good valuation levels have arrived and arrived for the last few months on many of these stocks.

Mudar Patherya , Investment Advisor is positive on the asbestos cement sheets sector as it is well-insulated from the global happenings. He said that the volume is rising and cement costs would be driven down significantly. " Visaka Industries is probably the most aggressive proxy in this entire business."

Patherya is also positive on Jay Ushin . "The Q4 has been very interesting, supporting the first three quarters. The annual report actually talks about a 30% increase in the topline of the current financial year."

Here is a verbatim transcript of the interview with Mudar Patherya on CNBC-TV18. Also see the accompanying video.

Q: Why do you like Visaka Industries? What's the story there?

A: In these troubled times one has got to look for sectors where the performance would be much better than last year and where the performance will not be significantly affected by what happens in the subprime or Morgan Stanley or Goldman Sachs or Lehman Brothers. So, one needs to look at a sector that is relatively insulated from all that is happening in the world. Asbestos cement sheets would be a good sector to look at. If something happens in the US, asbestos cement sheets would sell more than ever.

That by itself should not be a qualification for why one should invest in the business. There has been a positive divergence in the business over the last two-three quarters. The positive divergence comes from two very clear areas. Firstly, the sales have continued to rise consistently over the last couple of years irrespective of whatever has happened in the business. Secondly, the principle cost element in the business, which is cement is now beginning to trend downwards.

So with the huge increase expected in the cement capacity in the next two-three years, asbestos cement sheets would be the principal beneficiary. Firstly, the offtake is rising and secondly costs are going to be driven down significantly. We are beginning to see pricing power return to asbestos cement sheet manufacturers. Prices had been stuck at the Rs 5,000-6,000 per tonne level for years and now it's finally moving up to about Rs 7,200-7,250 per tonne level. So we are seeing three things; volume growth, value growth and cost reduction. So, these three factors will combine to generate significant value from a macro aspect.

Visaka Industries is probably the most aggressive proxy in this entire business. The market share over the last five-years has grown more than any other company in the business. That by itself should be a very safe qualification because it means that of the incremental growth that's going to come in the business over the next couple of years, Visaka Industries is probably going to account for a disproportionately higher share than the rest of the industry.

The stock is very attractively valued. The company reported close to about Rs 15-16 crore of post tax profit and an EBITDA of close to about Rs 30 crore in Q1. One can't annualize this business because Q1 of the financial year inevitably happens to be the best quarter. If everything goes well one will see a Profit After Tax (PAT) of anywhere between Rs 50-60 crore and if things actually goes bad for the business one will see a PAT of close to about Rs 47 crore.

The current marketcap of the company is close to about Rs 90-100 crore. If Visaka Industries has a bad year one would still be buying it at a Price-to-Earnings (P/E) of 2, less than 2 actually and if everything goes right, I think the P/E could be close to 1.5.

If I were to sell my house and buy a stock I would probably buy this asbestos-cement (AC) sheets manufacturing stock because it is coming at a very good valuation and there is a significant increase in profits expected over the next two-years.

Q: Any disclosures on that stock (Visaka Industries) before we talk about the other idea you have today?

A: I wish I could buy more but I own the stock.

Q: Jay Ushin do you own that? Why do you like it?

A: Yes. Jay Ushin is a very interesting stock. I had actually picked up this stock when I saw the quarterly movement of the company's performance. I am gratified to see that the Q4 has been very interesting, supporting the first three quarters. The annual report actually talks about a 30% increase in the topline of the current financial year.

There has been a cost escalation on the raw material side, which is steel, but I presume they have passed it on through contracts with their customers. They reported Rs 287 crore of topline for the year '07-08 and a 30% increment will bring them close to about Rs 350 crore. Let's assume that they actually maintain the margins. That means even if they report a net margin of 2%, which is very conservative, 2% on Rs 350 crore it gives you about Rs 7 crore; Rs 7 crore would still be post tax. So Rs 7 crore on an existing marketcap of close to about less than Rs 24 crore and this is after you factor in significant depreciation of nearly of about Rs 4-5 crore and interest of nearly about Rs 4 crore. So actually one is looking at Rs 7 crore post tax for the current fiscal going by what the company has projected for its topline growth. This auto component company will grow at a time when the industry is probably passing through a slowdown. When you look at these two factors, this company is going to outperform the industry growth and has been doing so for the last two years because it is a very interesting play.

Q: Speaking of autos, it is official this morning that Tatas are checking out of West Bengal. What does it mean for your city?

A: I wish I could tell you the truth. We have never passed through a grimmer scenario over the last 40-years, which probably accounts for my entire living in this city and state. I don't think we will pass though a lower moment. This is the lowest moment that we have passed in my lifetime at least.