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Last Updated : Jun 11, 2012 03:25 PM IST | Source: CNBC-TV18

Hidden gems: Ashish Chugh bets on two midcap stocks

In an interview to CNBC-TV18, investment analyst Ashish Chugh says, he is bullish on midcap stocks like Atul Auto and IFGL Refractories.

Anytime is the right time to buy fundamentally strong stocks. If the fundamentals of the company are good enough, it will give you good returns in the long-term.

In an interview to CNBC-TV18, investment analyst Ashish Chugh says, he is bullish on midcap stocks like Atul Auto and IFGL Refractories.

According to him, Rs 140-150 is a good level to accumulate Atul Auto for long-term.

IFGL Refractories, he says, looks undervalued on various parameters. “It could be a worthwhile investment at the current levels of Rs 40-42,” he adds.

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

Q: What is the story in Atul Auto?

A: Atul Auto is a small company based in Gujarat. The company is into a niche business. It manufactures three-wheelers, targeted primarily at passenger and cargo segments. Besides three-wheelers, it also manufactures some other customised vehicles like tippers, hydraulic hoppers and also vegetable vending vans.

The company has got manufacturing facility located in Rajkot. It is built on a 13-acre land which is owned by the company. It has a capacity to manufacture about 24,000 vehicles per annum.

The company also has wind power plants in Rajasthan and Gujarat. Total capacity is about 1.78 megawatt (MW). The Gujarat plant, which is located in Jamnagar, electricity from that plant is being used for captive consumption by Atul Auto.

If you look at the financials of the company, FY12 sales were about Rs 300 crore, up by about 50% over FY11. Operating profit was up by about 40% and profit after tax was up by about 65% at Rs 15.5 crore. The company has got a small equity of about Rs 7.3 crore. So, the EPS comes to about Rs 21. At the current price of about Rs 147-148, this stock is traded at a PE multiple of about seven. Promoters’ holding is 61%.

While analysing this company, I would like to break-up the analysis into what is happening on the business front and what is happening on the financial front. As far as business front is concerned, the company is doubling the capacity of production from 24,000 to 48,000 vehicles by putting up additional plant. It is currently selling its vehicles only in Gujarat and Rajasthan. It is expanding to 11 other states in the country.

It is putting up manufacturing plants in Bangladesh and Sri Lanka for catering to those markets. It has plans to manufacture ultra low cost four-wheelers, targeted at passenger and cargo segments. Management has plans to ramp up the sales revenues to about Rs 1,000 crore in the next five years.

On the financial front, the company has increased its revenues by about three times in the last four years. PAT has gone up by about 10 times. The debt of the company, which used to be about Rs 20 crore, long-term debt in 2008, has come to zero in FY12. It has become a debt free company. It has been a regular dividend player. The payout ratios have been extremely generous. This year this company has declared a 50% dividend and also a 1:2 bonus on the equity shares.

The point to be mentioned here is that the company has chosen to distribute 25% of its profit after tax as dividend, at a time when the company is doing both reduction of its debt and also capacity expansion. In this kind of scenario, we have many midcap companies which make good profits, but they don’t choose to distribute these profits with a minority shareholders on the pretext that they have expansion plans, they need funds for the expansion plans. So, here the company has maintained a balance between the funds which are required for repayment of its debt and also for future expansion and also rewarding the minority shareholders. That is something which may be good for the minority shareholders to stay with the company for a long-term perspective.

This being a company with very small level of operations, the potential for growth in operation is substantial. So, at the current price of about Rs 145-150, PE is just about seven and dividend yield is about 3.5-4%. The company gave a rights issue about nine months back at Rs 30, I would call it a mini bonus because the market price of the stock at that point of time was close to Rs 100. The company could have conveniently priced it rights at higher levels. But all these actions show that the company is good towards the minority shareholders. In this kind of market, that is a point where I would give high marks to the company. So, around Rs 140-150 levels may be good level to accumulate the stock. This may be a company to just buy and stay with for a longer period of time.


Q: Your next pick is IFGL Refractories. What is the story there?

A: This is a company based in Orissa. It manufactures refractories used mainly by the steel sector. It has got manufacturing operations in six countries. They have manufacturing plants located, besides India, in Brazil, China, US, Germany and UK. It has put up a plant for the manufacturing of bioceramic, which is nothing, but a substitute for human limbs. They make dental implants, bone implants, hip joints and these kind of things in the bioceramic plant. This typically is a business, which maybe a low volume, but high margin business for the company.

If we look at the financials of the company, FY12 sales were about Rs 608 crore, up by 27% over last year. Profit before tax (PBT) was up by 75% to 58 crore and profit after tax (PAT) was up by 65% to Rs 40 crore. EPS for FY12 is more than Rs 11. So, at the current price of Rs 40-41, the stock is traded at a P/E multiple of just about four. It has declared a dividend of 15% this year, a dividend yield of about 3.5-4% at the current market price.

In the last few years, the company has significantly scaled up its operations through acquisitions and also through setting up of Greenfield capacities. It has acquired in the past few years plants overseas through its subsidiaries, Monocon International and Hoffman Ceramics. By virtue of that, from just being a single location to plant, this company currently boasts off plants in six countries.

The company has recently put up a new plant in Kandla export processing zone, under a subsidiary IFGL Exports Ltd. The operations of that plant have started in the month of May. So, for this financial year, besides the capacities, which are already there and where the expansions have taken place, this capacity would also start contributing to the revenues of the company.

The company is the largest listed player in India in the refractory sector. Vesuvius used to be the largest in terms of revenues. But this year, the company has done revenues more than that of Vesuvius. It has become the largest player in the sectors. With sales of Rs 600 crore and a marketcap of Rs 150 crore, P/E of just about four, dividend yield of 3.5-4% and with the high promoter stake at about 71%, I think the stock looks undervalued on various parameters. It could be a worthwhile investment at the current levels of Rs 40-42.

Disclosure: Me and my family may have investments in IFGL Refractories.

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First Published on Jun 11, 2012 11:38 am
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