Ashish Chugh bets on House of Pearl Fashions

Chugh told CNBC-TV18, "The IPO of House of Pearl Fashions came in 2007 at a price of Rs 550 and the stock currently trades at close to Rs 70. It has seen a massive deterioration in the stock price. I think the primary reason for the stock price declining so much was that the performance of the company was nothing compared to what was promised during the IPO."

He further added, "The performance of the company was badly impacted because of various reasons. Primary reason being the turmoil, which we saw in the global economy and this company is primarily export based, exporting the US and Europe. What we saw in US and Europe over the past 3-4 years that was one of the reasons. Besides that there were other reasons which were one-offs. In one of the years the company suffered heavy forex loss. That was the year when many Indian companies suffered losses on their forex hedges. The company also made one time writeoffs when it closed down operations in some countries. Those were one offs and they may not be something which are recurring in nature."

"The company has got fully integrated operations right from design development to manufacturing and handle the entire supply chain. The company has got manufacturing facilities located in Gurgaon, Chennai, Vietnam, Bangladesh, and Indonesia."

"If one looks at the financials of the company, the FY11 sales were about Rs 2200 crore, with profit after tax (PAT) of about Rs 19 crore, which gives it an EPS of Rs 10. In the first 9 months of the current financial year, sales were up by about 20% to Rs 1900 crore and PAT is up by about 50% to Rs 16.3 crore. Full year expected sales could be anywhere between Rs 2600 and Rs 2800 crore with a PAT of about Rs 25-26 crore which would give it an EPS of about Rs 13."

"If you one looks at the balance sheet of the company, there is a debt of about Rs 450 crore. But if you look closely most of this debt is working capital debt in nature and the company has got less than Rs 50 crore as long-term debt. So I would not be too much worried about the debt of Rs 450 crore, this being secured by inventories and receivables."

"Now in a recent development this company has merged one of the group companies which is Pearl Global Limited with House of Pearl Fashion. Now what will happen because of this merger is that the equity is going up by just about Rs 2-2.5 crore, whereas this company is brining in close to Rs 600-700 crore in terms of revenues."

"So in the longer-term this merger is going to be beneficial to the shareholders of the company and company with revenues of about Rs 2700-2800 crore making a PAT of about Rs 25-26 crore this year, there is a high probability that the PAT can multiply in the coming years because all the problems, which the company was facing are now behind the company. It is available at market cap of about Rs 150 crore and at a steep discount to the IPO price. I think from a level of Rs 70, the probability of the stock losing 20% from these levels is much smaller than the stock going up by 50-100% from these levels."

Disclosure: I and my family have got investment in this stock.