Hidden gems: Ashish Chugh picks two stocks

Ashish Chugh, author of Hidden Gems is bullish on Liberty Shoes and TVS Motor. "Lower level of about Rs 95-100 provides a good opportunity for the long-term investor to accumulate Liberty Shoes. I think over a period of one to two years the stock can hugely outperform the market,” he adds.

TVS Motor, he says, could be looking good from a shorter term perspective primarily on account of under valuation, but the concerns are that Honda on its own has become aggressive in the Indian markets. "One has to watch out for the new launches which Honda is doing. That is going to impact not just TVS Suzuki, but the other players also," he adds. Multibagger ideas: PN Vijay's one risky and one safe pick Below is the edited transcript of his interview with CNBC-TV18’s Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: You have picked up Liberty Shoes. What is the story there? A: Liberty Shoes is a play on India’s consumption story. When you talk of footwear, two companies straightaway come to your mind, Bata and Liberty. Bata is the largest player in the sector. Liberty maybe is the second largest, not in terms of sales or profitability, but in terms of brand recall. Now, if you talk of Liberty, this company has got six manufacturing units and produces about 50,000 pieces of footwear a day. The company claims to be amongst the top five manufacturers of leather footwear in the world. The company has about six thousand multibrand outlets and 350 exclusive Liberty stores. Some of the sub-brands of Liberty are Force 10, Coolers, Fortune, Gliders, Senorita in various product segments. All brands have good brand equity and a good brand recall. If you look at the financials of the company, FY12 sales were about Rs 332 crore, roughly up by 10% over the same period last year. Profit after tax declined to about Rs 7.5 crore from about Rs 10 crore for FY11. Now, this company has got plans to aggressively add number one manufacturing capacity and also increase its presence in the southern markets through appointing more distributors and also opening exclusive Liberty stores there. In a recent development, this company has merged Liberty Retail revolution, which is a retail arm of the company, with Liberty Shoes Limited. Now, this company has been suffering on the profitability front. If you see the operating profit margin of Bata, Bata does close to 15% operating margins whereas Liberty does just about 7-8%. Bata has sales revenue of about Rs 1,500-1,600 crore and commands a marketcap of Rs 5,500 crore. Liberty does about Rs 325-350 crore of sales revenue and has a marketcap of just about Rs 170 crore. So, the point to be noted here is that even though Bata maybe bigger from Liberty in terms of sales by four times, the marketcap of Bata is roughly up more than 30 times that of Liberty. This is primarily on account of the fact that the debt is higher, but the margins are lower. Now, if you see the resale price movement of the stock, the stock had gone to a high of about Rs 125 last month. After that, it was shifted to the trade to trade category and fell to about Rs 95-100. So, when a stock trades in that trade to trade category, many short-term investors are really not interested in the stock. But I think a lower level of about Rs 95-100 provides a good opportunity for the long-term investor to accumulate stock of Liberty. I think over a period of one to two years the stock can hugely outperform the market. _PAGEBREAK_ Q: Why have you picked TVS Motor? A: It is primarily on account of the undervaluation of the stock vis-à-vis the peer group. If you see FY12 performance of TVS Motors and also the last quarter of FY12, the performance has not been very good. That is primarily on account of the fact that the operating margins of the company have declined. The volume growth of the company has been slower than that of peer group. The third and the most important factor is that the company’s Indonesian subsidiary, which started operations of about two years back, is still bleeding and made a loss of close to Rs 85-90 crore. However, if I look at the recent price decline that the price has suffered and also the valuations of TVS Suzuki vis-à-vis the other big players like Bajaj Auto and Hero Motocorp, I think the stock looks undervalued. Now, the largest player in the sector is Hero Motors. It does revenues close to Rs 23,000 crore, but has a marketcap of about Rs 42,000 crore. Bajaj Auto does about Rs 20,000 crore in terms of revenues, has a marketcap of Rs 45,000 crore. TVS Suzuki does Rs 7,000 crore of revenue, but has a marketcap of about Rs 1,600 crore. If you see Hero Motor, Bajaj Auto, marketcap is 2 times of their yearly sales whereas in case of TVS Motors the marketcap is less than 25% of the annual sales. If you see the dividend yield of TVS Motors, the company gave a dividend of about Rs 1.30 in FY12. That, at the current price of about Rs 33-34, translates into a dividend yield of roughly 3.75-4%. That I would say is good for a stock which trades in futures also. This company has got marketcap to sales of 0.25 as against marketcap to sales of 2 for the other players. If you see the standalone and consolidated numbers for TVS Suzuki, Rs 250 crore was the standalone profit after tax for FY12. Marketcap is about Rs 1,600 crore. That means a PE of about 6.5 on a standalone basis. Because of the loss in the Indonesian subsidiary, the net profit for FY12, on a consolidated basis, was about Rs 130 crore. That means a PE of about 12 on consolidated revenues for FY12. But I would like to caution here that this stock may be looking good from a shorter term perspective primarily on account of under valuation, but the concerns are that Honda on its own has become aggressive in the Indian markets. One has to watch out for the new launches which Honda is doing. That is going to impact not just TVS Suzuki, but the other players also. From a shorter term perspective, I expect the stock to reach a level of about Rs 42. I generally go for long-term investment, but this case, I would say that this is more of a short-term kind of a trading bet because taking a long-term call on the stock would mean that you got to watch out for Honda very carefully. There could be negative surprises in store for Suzuki through the new models, which Honda is planning to launch in the future. I think it may be a short-term trading bet purely on the point of view of the valuation gap, which is there between these players. But I would maybe closely watch the new developments taking place in the industry, if I have to take a longer term call on the stock. Disclosure: Me and my family have investments in Liberty Shoes. I don’t have positions in TVS Motors.