PN Vijay's multibagger ideas: Jyothy Labs & J&K Bank

In an interview to CNBC-TV18, Portfolio Manager PN Vijay talks about two multibagger ideas - Jyothy Labs & J&K Bank. He details out why investors should look at these two stocks to add to their portfolio.

J&K Bank
I have been trying to do some value mining in the public sector bank space which has been hit hard due to fears of bad performing loans. Jammu and Kashmir Bank is not normally on investors’ radar but it is an excellent bank with an excellent balance sheet and growth. For the last quarter, J&K bank reported a net profit increase of more than 50% for the year as a whole which was commendable given the general scenario in the banking space.
The net interest margins in J&K Bank one of the highest at 3.86% because a large portion of their deposits come from the state of Jammu and Kashmir and the return to normalcy there is making people invest more in banks and that sort of things and so their cost of deposits one of the lowest in the country which leads to an NIM of 3.86%.
The best part about J&K Bank is its bad loan portfolio. The gross NPAs have improved to something like 1.5% and their net NPAs is just 0.14%. Even the restructured assets have shown pretty good improvement. On the whole, the balance sheet is very healthy by any standards and I would say it is far better than most of the private sector banks which are trading at about 6 times its price earnings multiplier.
In terms of valuations, J&K Bank is around 0.9 times adjusted book of the current year and in terms of price to earnings, it is quoting at about 5.5 times its price to earnings. So one is looking at a pretty smart upside and one is putting a target of about Rs 1,050 on this counter.
The risks for this stock are obviously the general economic situation if inflation goes out of hand and again RBI reverses its soft money policy somewhere in the end of this year then like all other banks it is a money commodity player. So it will also get affected but that’s the only risk factor in this recommendation. Jyothy Labs
Many people don’t know it’s an FMCG company, they think of it as some way-out pharma research company. They did this high profile acquisition of Henkel India’s detergents business sometime ago. Today, on a consolidated basis this company has fabrics as one vertical, insect repellent is a very big vertical, Maxo and Ujala and then the third is Exo which is the dishwashing segment which is fast growing but a small segment in the overall FMCG space.
So they are clearly into fabrics and homecare type of plays away from personal care which is seeing maximum competition. They had some excellent set of numbers for the year. Though raw material costs and lab prices went up for them even then the EBITDA margins expanded pretty substantially due to aggressive cutting in employee cost. They have changed the total salary and sales structure which has led to a 4% reduction in employee cost.
Ad spend has also been slashed as they have used different methods of advertising. Their ad spend is one of the lowest in the industry, less than half of Hindustan Unilever (HUL) for example. So the company is doing all the right things.
In terms of triggers, they have just appointed a new CEO who is an old head from Reckitt Benckiser, HUL and other multinationals. He is expected to do a turnaround of Jyothy’s business and take it to a different level. They also have two large tracks of land - one in Chennai and one in Pondicherry for which they may en-cash it once the prices firm up there. So these are two large triggers which are available.
In terms of valuations the share is not cheap but compared to other FMCG counters it is quite cheap. It is trading at about 15 times 2013 valuations and we’ll like to look at FMCG more in terms of market cap to sales which is a proven practice globally and it is about 2.5 times market cap to sales which is less than half some of the other multinational majors.
Of course punters have caught on too and it has gone up a bit but I am giving it a target of about Rs 300 in the next 12 months. The only risk to this is perhaps a slowing down in consumer spending in India but that risk is rather unlikely because they are into products which are at the price of about Rs 100 mean and that segment is hardly affected by any slowdown because these are basics and essentials for any consumer. So it’s a fairly risk free investment and one should keep a target of about Rs 300 for the stock. Disclosure: I have no holdings in the stocks discussed.