Sep 25, 2012, 03.57 PM IST | Source: CNBC-TV18

Hidden gems: Ashish Chugh's 2 long-term picks

Investment analyst Ashish Chugh is bullish on HCL Infosystems and Linc Pens. HCL Infosystems, he says, may see time correction from these levels, but not significant downside. He advises investors to accumulate Linc Pens between Rs 42 and Rs 48 level.

Ashish Chugh

Investment Analyst & Author, Hidden Gems

Expertise : Equity - Fundamental

More about the Expert...

Investment analyst Ashish Chugh is bullish on HCL Infosystems and Linc Pens . HCL Infosystems, he says, may see time correction from these levels, but not significant downside. He advises investors to accumulate Linc Pens between Rs 42 and Rs 48 level.

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Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

Q: Why are you so bullish on HCL Infosystems?

A: I believe the stock price probably discounts the negatives in the company. HCL Infosystems is not going through the best of its time. The hardware business is facing a lot of margin pressure. Also, the distribution business is facing a lot of challenges because majority of the revenues in the distribution business comes from Nokia. With the declining market share of Nokia vis-à-vis other mobile players like Samsung and Apple, it is taking a toll on both the revenues and profitability of the company.

If you see FY12 financial performance, the revenues of the company have declined marginally to about Rs 10,800 crore from about Rs 11,400 crore. The profit has declined by about 60 percent to about Rs 70 crore. So, the affect is already visible on the financial.

If you see the various opportunities and possibilities, which are there in the company, I think the stock price probably discounts the negatives. First, we keep hearing about the rumours of Lenovo taking a stake in HCL. I think management has clarified that there is no truth to these rumours. But I would say that this is a possibility that cannot be totally ruled out because of various factors. One, hardware business is a low margin business for the company.

Secondly, the management has indicated that they do not want to put any fresh investments in the hardware business and also have categorically stated that they do not want an increase in the market share in the PC business at the cost of margins. So, I think the hardware or the PC business of the company, which is already there in separate subsidiary, there is a possibility that it may be sold to some other player. Since they already have working relationship with Lenovo, that’s the reason we keep hearing about these rumours. But that’s a possibility that cannot be totally ruled out.

The distribution business of the company is facing short-term challenges mainly on account of decreasing market share of Nokia. But the company is doing distribution for other players like Toshiba, Apple iPod. They have a tie-up with Hitachi and Kingston. So, a lot of potential exists. Since they already have the distribution network and also the service network, the possibility of the company adding new companies into the distribution chain is something that cannot be totally ruled out. Given the quality of the management and their potential, significant scale up can happen in this business.

Third, the service business of the company and the cloud computing business of the company is a business where a lot of potential exists. The company tying up with strategic partners for various service industry things is very much a possibility.

If you see the track record in terms of rewarding the shareholders, this company has been giving dividend of between 300-400 percent over the last five-six years. That is about Rs 6-8 per share with Rs 2 face value. This year also they gave a dividend of Rs 3. So, things are not going well for the company, but the stock price at Rs 40 probably discounts the fact that the next quarter is also not going to be good.

I do not see too much of downside from these levels. The stock is already discounting the negatives. It’s available at a five-year low at the price of Rs 40. So, we may see time correction from these levels, but not significant downside.

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