Tulsian picks 2 stocks that can give 25% returns in 2-3 yrs

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SP Tulsian of sptulsian.com has selected Excel Industries and ISMT as multibagger stock picks for the day. He expects both these stocks to fetch 25% returns annually over next two-three years.

Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying videos.

Excel Industries

This is a company promoted by Shroff family who control Excel Crop and United Phosphorus. The company manufactures agro, water treatment and mining chemicals. Apart from that, they are also making pharma intermediates and other derivatives used in the similar industry. The company came out with their quarter 2 results on Wednesday.

For the first half they have posted an EPS of about Rs 9. They have developed real estate at Jogeshwari so part of that income has been reflected in Q2. But one knocks that off, the company is in a position to post an EPS of about Rs13. As a part of redevelopment of Jogeshwari plot located in western suburbs of Mumbai, they have retained 41% of developed property. The value of this property is estimated to be at Rs 60-65 crore.

If we consider other investments made by the company in listed stocks, the total value comes to about Rs70-80 crore. Their market cap is around Rs75 crore. Talking about the debt position, on a net of working capital basis if one knocks off current net assets from borrowings it stands at about Rs 50 crore. So, it can be termed as a debt free company.

The potential seen in mining chemical and agro chemical space in which the company has prominent position gets reflected, with a top line of about Rs 300 crore achieved on an annual basis. With three plants located in Gujarat and Maharashtra, they are likely to remain on a sound footing.

The share is ruling at a PE multiple of 5 price to book of 0.6-0.7. Other real estates are also having a good value. Taking all this into consideration, this looks to be a steady and good stock. One can expect a return of 25% on an annualized basis over next two-three years if bought at the current price of Rs 68.

ISMT

They are largest seamless tube maker in the country. Recently, they completed expansion of seamless tube making enhancing the capacity to move to 465,000 tonne per annum. Apart from that they also have steel bars making capacity of 350,000 tonne which will be largely used for captive consumption.

So, they also have matching raw material requirement capacity. The company is setting up a new power generation plant of 40 MW at Baramati. It will be catering to their domestic and captive requirement. Power is another cost which attracts maximum cost to company.

The result of capacity expansion will get reflected in FY13 because they have recently completed expansion. If one considers the old capacity of 465,000 tonne and the production achieved in FY11 it works out to about less than 40% of the capacity. The turnover in that year was about Rs 2,500 crore also in Q1 they have posted a turnover of about Rs 760-780 crore.

The turnover for FY13 is expected to be at about Rs 4,000 crore plus. But even if we consider the present financial performance, the face value of a share is Rs5, the company should be able to post an EPS of close to about Rs 6 for FY12. Apart from that, their cash EPS has been very high. It is almost 150% more than operating EPS.

Their competitor Maharashtra Seamless has acquired 13.5 lakh shares from open market at Rs 31. So that constitutes to about 1% of present issued share capital of the company. I don't know whether there is any kind of alliances or I won't call it as a stake sale because present promoters are already holding more than 50%. But I see this as a big corporate development.

If Maharashtra Seamless takes it over by any chance which is a premature wild guess or they have any kind of alliances then that will be a value accretion for the stock. If that news unfolds the share can move to Rs 40 plus. But otherwise also on a pure operating performance, if one takes a long term view this is a steady stock and is capable to give a return of 25% annually over next 2-3 years.

Disclosure: I have no personal holding in any of the stocks discussed