Bullish on Pitti Lamination, Brandhouse: Ashish Chugh

Ashish Chugh, Investment Analyst is bullish on Pitti Lamination and Brandhouse Retail.

Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: Your first pick today is Pitti Lamination, what is the story there?

A: For Pitti Lamination, the numbers for the past few quarters have been pretty good. Also, in December quarter, there has been a significant increase in both revenues and profitability of the company.

This company provides ancillary support to power, transportation and capital goods sectors. This company manufactures electrical laminations used in electrical motors, pumps, alternators and other electrical machines.

If you look at the financials of the company, for the first nine months of the current financial year, the company has registered 80% increase in revenues to about Rs 183 crore. The operating profit is up by almost 100% from Rs 11 crore to Rs 22 crore. The company has registered profit before tax (PAT) of about Rs 5.6 crore as against the loss of roughly Rs 2.5 crore for the same period last year. Its full year earning per share (EPS) is expected to be between Rs 8-9. That means that at the current price of about Rs 35, the stock is trading at a P/E multiple of just about four. Cash EPS this year is expected to be between Rs 14 and 15, which means that stock is available at a price to cash EPS of about 2.5.

This company has learnt a lot from global slowdown, it was more of a soul searching and learning experience for the company. The company, which was focused mainly on the export market before the global meltdown, started exploring the Indian markets where they realised that there is a lot of potential and also the operating margins are much better compared to the exports markets. So, right now the mix of the Indian business in the total revenues of the company has increased much more than it was about two years back. The growth in revenues is on account of growth in both the domestic business as well as the export business.

This company has got orders from various domestic and international companies. Besides the smaller orders, this company has got about Rs 170 crore of order from GE, which is to be executed over the next few quarter. So that is something which provides revenue visibility to the company atleast for the next couple of quarters.

If you look at the valuations of the company, at the current market price of about Rs 36, this company has got a marketcap of about Rs 35 crore. This company is expected to do operating profit of about Rs 30 crore this year. So, for a company doing an operating profit of Rs 30 crore, marketcap of Rs 36-35 crore looks very cheap.

Also, P/E multiple of about four and price to cash EPS of about 2.5, I think is very reasonable for a company where the user industry is witnessing a good growth. The company has got a book value of about Rs 65 as against that the market price is about Rs 35-36 which means that it is traded at almost 50% of the book value. A marketcap of Rs 35 crore against expected revenues of Rs 250 crore, I believe the stock looks extremely cheap from all counts.

I think what is happening is that the good performance of the company has been ignored by the markets mainly because of the uncertainty prevailing for some time. Also because of the fear psychosis in the minds of investors, people are not willing to look at smaller companies. But I think that the company has been consistent in delivering performance, there is growth which is taking place in the user industry. I think as sanity returns to the market and people start again looking at smaller companies, I think these are the kind of stocks, which can really go up very fast.

Also, the stock is trading at very close to its 52-week low of about Rs 32. So, I think from the current levels of Rs 35-36, the market is uncertain, it may drop by 10-15%, but I do not see a fall more than that. In the event of the markets recovering and midcaps performing, I think the stock can be a big outperfomer.

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Q: The other stock you have picked out today is Brandhouse Retail, what is the story there?

A: Brandhouse Retail is a part of S Kumar group. This company is involved in developing and managing exclusive brand outlets for foreign brands in India. The companies, which are in the brand portfolio, include Reid & Taylor, Stephen Brothers, Carmicheal House, Belmonte and Dunhill. This company has got a store network of close to 800 stores, which are spread over 90 cities in India and a total covered area of about nine lakh sq feet. Besides the metropolitan cities, this company has got stores in tier 2 and tier 3 cities also in India.

The company has set up a JV with the Italian brand called OVC, under which Brandhouse Retail will hold about 62.5% and 37.5% will be held by OVC. The plan is to open about 200 exclusive retail outlets for OVC brand over a period of the next five years.

If you look at the financials of the company, FY10 sales were about Rs 660 crore, which were up by about 20% of FY09. Profit after tax (PAT) was about Rs 16.2 crore, which was again up by about 20%. In the first nine months of the current financial year, sales are about Rs 570 crore, which is up by 12% over same period last year. The PAT is almost flat at about Rs 19.5 crore. EPS on an annualised basis is expected to be about Rs 4.5-5. The stock currently trades at about Rs 25, which means that it is trading at a P/E multiple of about five-six.

This company is a play on India