Multibagger picks: Rajen Shah's two long term bets

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Multibagger picks: Rajen Shah's two long term bets

Rajen Shah of Angel Broking in an interview to CNBC-TV18 picked two multibagger stock ideas for the day. He expects JK Tyre and India Cements fetching better returns in the span of two-three years.

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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

Rajen Shah, chief investment officer, Angel Broking in an interview to CNBC-TV18 picked two multibagger stock ideas for the day. He expects JK Tyre and India Cements fetching better returns in the span of two-three years.

"JK Tyre has come down to very compelling levels. I expect the slow down in the auto industry to be there for a while. For the foreseeable future we at Angel Broking expect the auto industry to grow at least about 12% for the next two-three years. More than that the replacement demand has also started happening, that should be good for the tyre industry. In the next two-three years it should touch Rs 200 levels that would be my target."

"It is contra call on India Cement. The company is a leading player in south. Cement demand is expected to pick-up ahead. At these levels there is very less downside of about 10-15% but the upside could be as high as 100% in the next three years."

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Below is the edited transcript of Shah's interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18.

On JK Tyres

This stock has come down to very compelling levels. It is quoting at about Rs 75. The market cap of the company is about Rs 300 crore. I expect the slow down in the auto industry to be there for a while. For the foreseeable future we at Angel Broking expect the auto industry to grow at least about 12% for the next two-three years. More than that the replacement demand has also started happening, that should be good for the tyre industry.

Just to make a small comparison in case of the tyre industry, MRF would report a turnover of about Rs 10,000 crore this year and the market cap is about Rs 3,000 crore. Apollo would report turnover of about Rs 11,000 crore and the market cap is about Rs 3,000 crore. The market cap of these two companies is about 30% of the turnover.

Given that, JK Tyre it is too cheap. Their turnover (consolidate revenue) this year would be about Rs 7,000 crore. Their market cap is just about Rs 300 crore. Logically, if you were to give it the same market cap as MRF or Apollo it should have been at Rs 2,000 crore. JK is quoting at about Rs 300 crore market cap.

Even if the quality of management and the brand is discounted, JK needs to trade at least Rs 1,000 crore market cap. So it is a clear cut 200% upside in the stock. The other reason why I feel that tyre industry should do well is that rubber prices will collapse from here. I expect prices of rubber which is used to manufacture tyre to come down from Rs 215 per kg to about Rs 175-180 levels.

JK spends almost Rs 2,500 on rubber every year - 15% collapse in rubber prices will straight away lead to about Rs 375 crore of saving on the rubber cost. Sometime during the next three years, I expect their earnings to climb as high as Rs 35-40 per share and that is when the share can easily go upto Rs 200 levels. In the next two-three years it should touch Rs 200 levels that would be my target.

On India Cements

It is a contract call. In November 2004, India Cement reported a huge loss of Rs 96 crore and the stock was at Rs 31. At that time, the capacity utilisation in South was 65%. Cement prices were poor and the demand was weak and that is when you get the stock cheap. The best time to own a commodity stock especially a cement commodity stock is either the demand is very weak or the supply is abundant.

Currently, the supply is abundant and the capacity utilisation in South India is about 65 to 70%. That is the reason why you are getting India cement at this kind of valuations.

ACC is about 30 million tonne - (I have taken out cash from the market cap and added the debt) if you work that 30 million tonne comes to around Rs 18,000 crore that comes to Rs 600 crore per million tonne. For Ambuja , 30 million tonne comes to about Rs 20,000 crore and that works out to around Rs 650 crore per million tonne.

One would be getting South based Madras Cement 11 million tonne for Rs 5 crore so Rs 450 crore per million tonne. But for India Cements, one is getting about 16 million tonne for about Rs 4,200 crore market cap and debt added together works to about Rs 265 crore per million tonne.

On all parameters, India Cement looks too cheap actually. It is a number one player in south so in the next two-three years when the demand picks up we will see this company doing exceptionally well. That is what happened in 2004-2007 period. The stock went up 10 times. I am not saying the stock will go up 10 times but clearly see 100% upside in the next three years.

They are owners of Chennai Super King teams and sometime during 2012-2013 I do expect something to happen. The value of the Chennai Super King teams as of now would be somewhere around Rs 750 crore or so. If you take out that from the market cap the stock is too cheap.

N Srinivasan himself has starting buying shares in the market by acquisition. They acquired about 3 lakh shares at Rs 70 levels. At these levels there is very less downside of about 10-15% or so but the upside could be as high as 100% in the next three years.