PN Vijay's top picks: Vadilal Industries, Lakshmi Machine

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PN Vijay, Portfolio Manager, www.askpnvijay.com in an interview with Udayan Mukherjee of CNBC-TV citied his multibagger stock ideas for the day. He sees Vadilal Industries  and Lakshmi Machine   fetching good returns ahead.

According to Vijay, Vadilal Industries fairly significant player in the ice-creams, frozen yogurts and frozen fruits market. It is expected to touch Rs 250 or so in the next 12-18 months.

He believes that Lakshmi Machine has the strongest balance sheet amongst the the capital goods manufacturers. "LMW at about Rs 2,100 plus is fairly safe bet. One could expect it to go above Rs 2,500 or so in the next 12 months. I don't see any great downside in the stock," he added. 

Also Read: Investors waiting for a catalyst to buy in India says UBS Sec

Below is the verbatim transcript of the interview. Also watch the accompanying videos.

On Vadilal Industries  

Vadilal is a fairly significant player in the ice-creams, frozen yogurts and frozen fruits market. It's been traditionally Gujarat based company. The ice cream  market in India about Rs 3,000 crore and about 60-70% is gone into the organized sector. Amul is the leader with about 35-40% market share and Vadilal and Levers after their acquisitions share about 22-23% each.

Vadilal has got a very strong brand equity in Western India. It's moved into Rajasthan. It's the biggest player. It moved into Delhi also, the biggest ice cream market in the country. The company did well. Last year they ended up with a EPS of about close to Rs 7. In terms of price earnings it's around Rs 17-18.

They have got strong expansion plans. It's a low equity capital of Rs 7 crore or something. The market cap sales ratio is very low compared to other FMCG companies. The brand power is not getting reflected in the share price.

The immediate trigger was the listing of the stock in the NSE a few days ago which gave it a sort of national presence and the stock went up sharply. But, even then, if you correct and after that Vadilal should be good.

Because right now people are moving to branded stocks, FMCG stocks etc, and in terms of valuations it's pretty low. There is some concern that it's got a bit of debt on its portfolio. But, probably it might do some fund raising at some point of equity because the promoters have a very large stake to bring down the debt.

The footprint is very strong and its moving in the Northern India market, the biggest market. And it should touch Rs 250 or so in the next 12-18 months.

On Lakshmi Machine

Lakshmi Machine works with a Coimbatore based textile machinery manufacturer. It's a old well-established company, practically a monopoly in India and one of the biggest in the world.

The textile companies have been getting a fresh lease of life with the huge textile modernization fund the government has given them. So, LMW is having a very strong order traction of about two years revenues it's got in the form of orders. Incrementally all these orders are going about Rs 1,000 crore per quarter.

The company did very well in the last quarter. The revenues going up by more than 50% and the profits also about 50%. The EBITDA level, the company had a bit of problem because they have started a big Chinese operation which is getting ramped up. They also had a labor settlement with the workers.

But it's a very strong company and it's a zero debt company. It's a cash rich company. And among the capital goods manufacturers I think it's got a very strongest balance sheet.

In terms of price earnings it's at 15 times and historical it's 11-12 times its forward. It's got a very good brand equity in the textile industry. It has a waiting period of about one year for its supplies.

So LMW at about Rs 2,100 plus is fairly safe bet. One could expect it to go above Rs 2,500 or so in the next 12 months. I don't see any great downside in the stock.

Q: It's been a worrying week for the market in many ways both from what the RBI had to say and global developments. What's your sense of what this market is trying to do right now? Holding this range or is there a breakdown coming?

A: One saw a bit of nervousness immediately after the credit policy. But, my experience with this market is the market is always very jittery before the event. After the event it is sort of settled down to lower volatility. The credit policy itself was very expected.

One thing Subbarao did say which we didn't expect it to be in the part of the script is he said that the growth is very strong in spite of interest rates hike. Which is not a general view among industry and in government also. The government is concerned about tax collection etc.

So, RBI does not have too many takers when it says that growth is still robust. But that's why probably RBI is justifying its continued rate hikes. But, the market is finding its feet. The players are waiting for some good news which is been very short in coming.

And I don't see any great downsides. The growth expectation is around 8-8.5% which is doable. Inflation is flattening out but a bit too slowly. And Greece is out of the way and US is coming in terms with the slow recovery.

So I don't see a breakdown. But, we need some good news badly in the Indian market for it to go up. So I am quite optimistic. Maybe in the next two months one may get a bit of sloshing around but upside one should be okay.