Ashish Chugh positive on Narmada Gelatines

Chugh told CNBC-TV18, "Narmada Gelatines is a small company based in Jabalpur. This is the part of Shaw Wallace group. This company manufactures gelatine. The end-users of gelatine are primarily food and pharma sector, which are growing at a good pace in the country. If you look at the financials of the company, FY11 sales were about Rs 91 crore, operating profit was about Rs 16 crore and profit after tax was about Rs 9.5 crore. This company has got a small equity of about Rs 4 crore.

In the first nine months the sales are up by about 15% to about Rs 76 crore and the profit after tax has also grown by 15% to about Rs 7.5 crore. So, its full year EPS can be in the range of Rs 25-26. The stock is currently available at about Rs 100-102 which is a PE of about 4. This company is totally debt free. The company has got cash in hand and cash and cash equivalents are close to about Rs 15 crore.

About Rs 40 crore is a marketcap at this point of time so the enterprise value of the company is just about Rs 25 crore. This is a company which is more than 50 years old. Enterprise value of Rs 25 crore against a gross blog, which is valued at historical basis of about Rs 50 crore, the company is available at a steep discount to the intrinsic worth of the company. The book value of the company is about Rs 155.

I am not including this year’s profit. If you include this year’s profit the book value can be as high as about Rs 175 to Rs 180 as against a book value of about Rs 155 the stock is currently available at about Rs 100. This company has been a regular dividend payer. Last year the company gave 40% dividend, which at the current price would result into a dividend yield of about 4%. But hopefully with higher profits this year, the dividend should go up to 45%, this means that one can be assured of a dividend yield of 4.5% if nothing else.

So, you have a business which is available at extremely reasonable valuations; enterprise value of Rs 25 crore against a company which is doing PAT of Rs 10 crore, paying a tax of Rs 5 crore in a year. So, the stock definitely looks undervalued. Over the last few years Shaw Wallace group has almost sold all its listed companies. In this case they are only waiting for the right valuations.

Whether the sale happens or not, when it happens are questions which I do not have an answer to at this point of time. But even if you see this company fundamentally from a dividend yield point of view and from safety point of view at Rs 100 the stock looks to be a stock with extremely low downside. In case of the sale of the company happening it could be a bonanza for the shareholders.

Disclosure: I and my family have investments in the above mentioned stock.