Tater's multibaggers: Esab India, Electrosteel Castings

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Tater's multibaggers: Esab India, Electrosteel Castings

Aashish Tater, head of research at Fort Share Broking shares his multibagger ideas on CNBC-TV18. He analyses Esab India and Electrosteel Castings and his targets for both these stocks.

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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

Aashish Tater, head of research at Fort Share Broking shares his multibagger ideas on CNBC-TV18. He analyses Esab India and Electrosteel Castings and his targets for both these stocks.

Below is the edited transcript of Tater's interview with CNBC-TV18. Also watch the accompanying video.

On Esab India

On July 7, 2011 we suggested that the company would come with an open offer around Rs 550-600 because charter would have been taken over by some strong hands. Fifty five percent is already owned by promoter, 20% is in strong hands like FIIs and DIIs and remaining float is 18-20%. They have come out for 26% open offer. Now, the weak hands would go and tender the stock and then the actual story would begin.

If we look at it from the parent's perspective Colfax, I am taking a standalone call on the company, it is roughly USD 2 billion with a price earning multiple of 50 times listed on NYSE bourses. The company is estimated to grow at approximately 32% CAGR over next three years. If we take that call on annualized equivalent value, it roughly works out to be at 11.1% which is on standard basis is very high.

From Indian perspective, this had to be a very slow year for companies like Esab India and they have done well in terms of bottom-line. We still expect them to clock close to Rs 50-52 crore in terms of bottom-line. For next year, we expect them to go back to their old levels of profit. By FY14 they will be doing close to Rs 80 crore of profit. Of these 20% strong hands not even 10% go and tender, weak hands are out of the system, the stock should be hovering around Rs 500-530 even after the tender offer is over.

But what will happen, with 75% and I am taking a call that not more than 20% would come, whatever you buy now and you tender, it should get absorbed. The remaining 25% will be again in the strong hands. People who have tendered at Rs 550 levels, if they get anything at Rs 500 odd levels would buy the stock.

From longer term perspective, Rs 80 crore of market cap for a company like Colfax should at least get a price earning multiple of close to 14-16 odd times on conservative side in average times. In good times that PE multiple would expand to 20-22 price earning multiples. They recently announced about the people who will to lead Esab business from Colfax and all of them have expertise of at least 10-15 years in their domain. When this integration works, this is going to be the power of multiples.

We had a target of Rs 1,000, but looking at the one who has acquired this particular stock post offer from two years perspective, this could even go further to around Rs 1,200-1,300. This is a stock which will give a dividend yield of close to 4-4.5% on conservative side and a target of Rs 1,200. If one calculates a CAGR return it roughly works out to be over 50% from next three year's perspective.

This is a definite buy and right now it is a hold because Rs 550 would not be conquered till this open offer goes out. Once the system absorbs that liquidity, then there will be scarcity premium and talks of delisting. This is because if they are struck with 76-77%, I don't think Colfax will take a call of selling 2% but they would definitely go for delisting Esab.

On Electrosteel Castings

Electrosteel Casting was a proxy that what we took a call on Tata Metaliks. It didn't work for us. After having a multibagger idea at Rs 120, we had to come out with a sell report on Rs 98 because we had taken a negative call on the entire steel sector. We felt that even these kinds of proxy businesses would dwindle. Tata Metaliks from Rs 98 corrected to almost Rs 50-55 where we felt that the downside looks limited. Similar is the story for Electrosteel Casting. They are number one and largest players in this particular industry.

The best thing is that the company has gone for vertical integration and would start benefiting in FY13 and 14 results. Taking a call from this particular quarter, because of high input prices the company is down into red. But we feel the margins would improve and for next year we are working for an EPS of close to Rs 4.5-5 on conservative side.

If there is a sentimental change in terms of steel outlook, the EPS for the input prices would again go and change to Rs 6-6.5. From conservative side, take a call of Rs 4.5-5. This is one management which has rewarded its shareholders by paying a dividend of Rs 1.25. This time they would not be able to pay this handsome dividend because the business itself had to face lot of challenges. But once that vertical integration comes into play, they would again be rewarding the shareholders.

I was going through old brokerage reports and they were pegging a target of close to Rs 50-60 odd mark, which is reasonable given the book value of Rs 52 a and good management with good mix of integrations. From a two years perspective, the business would do close to Rs 7 in two years and companies like Electrosteel Casting definitely deserve a PE multiple of seven-eight times. So, from that angle also if someone buys now rather than trading the stock here and there and sells partly at Rs 30-35 and then again sells the remaining quantity at Rs 55-60 the average return that he would get is roughly around 58-60%.