Tulsian's multibaggers: Aarti Industries & Techno Electric

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Tulsian's multibaggers: Aarti Industries & Techno Electric

SP Tulsian of sptulsian.com joins CNBC-TV18 to pick out his favorites as multibagger stock ideas. He chooses Aarti Industries and Techno Electric.

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SP Tulsian of sptulsian.com joins CNBC-TV18 to pick out his favorites as multibagger stock ideas. He chooses Aarti Industries and Techno Electric.

On Aarti Industries

This company is into making specialty chemicals and intermediates which are used in pharma, power, paper and petrochemical industries. The company has about 18 plants in four states.

If you see the financial performance, I think it is quite robust. The company has been consistently improving its performance. In the first half of FY12, the company has posted an EPS of close to Rs 4.70, that is a growth of about 25% over the corresponding period of the previous year, and if you see the track record of the company, they have been a consistent dividend payer. For FY12, the company has paid a dividend of 50%. It has a face value of Rs 5, so the company has paid a dividend of Rs 2.50. 

Though they have the cluster of plants, since they are catering to different sectors of the industry, it acts an agent and is not concentrating on any one industry. Recently it has forayed more into the agri-inputs because the agro-chemicals now have started Taking off quite well and yielding better margin. So that is the advantage which has largely been seen reflecting in the first half results of the company. And I think the same trend is likely to continue.

Agro-chemicals which has a contribution of about 20-25% in the portfolio, is likely to get increased over next couple of years, may be to about 30-35%, and that will improve the margins of the company in times to come.

Book value is close to about Rs 63 per share. If you see the debt in the books of company, that is close to about Rs 500- 550 crore, which is largely of about 80-85% for financing the working capital. The chemical industry is quite a high working capital intensive industry. And since Aarti Industries has net current assets of Rs 600-650 crore, the major portion of this debt has been used for financing the working capital. Foreign currency load is very minimal, may be close to about Rs 50 crore or something like that in the form of FCCB. So taking all this into consideration, I think the stock looks quite interesting at Rs 47. If one can keep a view of about may be one year, one can expect a price of about Rs 60.

On Techno Electric

This company is largely an engineering, procurement and construction (EPC) player in the power sector plus they are catering to the oil refineries and the petrochemical sector also. But their main focus has been more as an EPC player into the power sector and their clienteles include ABB, BHEL, NTPC and Alstom. In fact, all the power equipment makers hire this company as an EPC player since those companies do not have the divisions for carrying out the EPC activity. So this company has that advantage too.

They have an order pipeline of close to Rs 1400-1500 crore, and in the recent past, the company has forayed into power generation also. This is probably the first company which has created a capacity of 100 MW plus in to the wind generation segment that is green energy. I don't think that any company has created that kind of capacity in such a short tenure under the REC program. Techno Electric now has a portfolio of about 145 MW because they have created a new capacity of 101 MW.

Their debt position is quite within the limit, in fact not much pressure is seen, and if you take the case of first half performance, the top line grew by about 25% while the bottomline grew by about 50%. In fact the EPS which was close to about Rs 20 for FY11 is now seen at close to Rs 15 for first half of FY12.

Since the earning EPC players are generally back-ended because of the execution or completion of the projects in the second half, I am expecting the company to report an EPS of over Rs 30 for FY12.

Taking all this into consideration, the stock looks quite interesting ruling at a PE multiple of close to about 6-6.5 times and considering the order pipeline and the order inflows are likely to be received by the company.

The contribution to be added by the power generation makes the stock a good buy and I am expecting a price of at least Rs 250 in six months time. If somebody can keep a view of one-two year, I think this stock has capability to give a return of 20-25% on an annualized basis.

DISCLOSURE - Tulsian has no personal holding or interest in any of the stocks discussed.