Two 'hidden gems' of the market revealed

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Investment analyst and author of Hidden Gems, Ashish Chugh recommends two stocks - Superhouse Leathers and Vijay Shanthi Builders.

Though Superhouse Leathers has given negative returns to its investors in the past, a couple of recent developments in the company makes Chugh recommend the stock.

In case of Vijay Shanthi Builders, the downside looks to be minimal and the upside looks huge, according to Chugh. The only negative being, Chugh cautions, that this stock is traded in the Z-Group of BSE.

Excerpts from CNBC-TV18's exclusive interview with Ashish Chugh:

Q: Superhouse Leathers- What's this story all about?

A: Superhouse Leathers is an exporter of leather products. This company makes the entire range of leather goods, which include shoes, safety shoes, fashion accessories and leather garments. This company has got manufacturing operations in 11 plants. All these plants are located in Uttar Pradesh.

Besides that, this company has holdings on subsidiaries in UK, USA and Australia and a marketing office in Dubai. The company mainly exports its products to over 35 countries. The company's market too, has almost doubled in the last one year. But this stock has been an under performer and has given negative returns to the investors in the last one year.

The main reason for that is, first, there has been a decline in the profits of the company. The topline is stagnant, but the net profits are coming down. The second thing is that the company, even though it has been making profits, has never rewarded its shareholders or given any dividend to them.

Inspite of that, I am recommending this stock because there has been some recent developments in the company, which are appointed to shape better things to come.     

After these two moves, the shareholding of the promoters, which stands at a low of about 32%, will go up to about 48-50%. This company has got a high turnover to equity ratio; it has a turnover of close to Rs 250 crore and any improvement in the topline and margins of the company will have a substantial effect on the bottomline of the company.

With the promoters shareholding going up from 32%  to 48%, I think one can look forward to higher margins because the company has other group companies involved in similar business. They would obviously have been tempted to give more profit to the other companies.

With the merger happening and the fact that the promoter's holdings is going up from 32% to 48%, one may see a dividend this year and maybe higher profitability in the next year. So as far as the negatives are concerned, they are fully discounted at the current price, which is about Rs 37-38. And any positives happening in the company can take this stock much higher. Hence, the reward to risk ratio in the stock is extremely good. 

Q: Do you own the stock or have owned in the last month or so?

A: Yes, I have investments in Superhouse Leathers.

Q: Tell us about Vijay Shanthi Builders?

A: Before I say anything about Vijay Shanthi Builders , I would like to put in a word of caution. This stock is traded in the Z-Group of Bombay Stock Exchange and hence it is advised for extremely high-risk investors. Vijay Shanthi is a regional play on the realty sector. This company has its operations in the city of Chennai. The promoters of Vijay Shanthi have been in this field for more than a decade and all the projects that they have done are located in Chennai. Recently, they have ventured out of Chennai and have acquired lands at other places. They have a land bank at Udaipur.

This company has 12 ongoing projects in Chennai and these projects are under various stages of implementation. They all will be completed within the next two years. These projects will add about Rs 250 crore to the company's topline over a period of two years.

Besides these projects, the company has recently acquired about 25 acres of land in Chennai and they are in the process of making it to 40 acres. About 15 acres is still under the process of acquisition and the company plans to launch a project there, valued at Rs 250 crore. So this is a company, which has got a market cap of just Rs 50 crore. This company is a dividend paying company; it paid a dividend of 5% last year.

This year we expect the company to do a topline of close to Rs 65 crore and a profit of around Rs 5-6 crore, which will give it a EPS of Rs 5. In the next two years, in case all these projects go through, they can add about Rs 300-400 crore turnover. So this company is capable of growing at 100% over the next two-three years.

At a price of Rs 42-43, this seems to be a stock, where the downside looks to be minimal and the upside looks huge. The only negative point in this stock is that probably it is trading in the Z-Group and that is why most investors who do not want to take much risk are not interested in buying this stock.

Q: Any disclosures in this stock you would like to make?

A: I have invested in Vijay Shanthi Builders too.