Ashish Chugh talks about his 2 hidden gems: GNFC & Gati

Ashish Chugh, investment analyst & author of Hidden Gems discusses with CNBC-TV18’s Udayan Mukherjee his two hidden gem ideas – Gati and GNFC. He recommends these two multibagger ideas for long-term investors.

Below is an edited transcript of his interview. Watch the accompanying videos for more. Q: Why is GNFC on top of your list today?
A: GNFC is a pure value play in the fertiliser sector. This company is a government of Gujarat undertaking where the Gujarat government holds close to 41% stake. The company is broadly in two business segments - fertilisers and industrial chemicals. The fertiliser of the company is sold under the Narmada brand which is a well established brand and they have got distribution networks all across the country.
It also has a small IT infrastructure and IT services business though it does not contribute much to the revenues of the company. It also has a 33 mw power cogen plant. It has undertaken various expansions in the past two years and all these expansions would be fully operational by FY13. GNFC has spent close to Rs 4,000 crore for doing six expansion projects. Three of these expansion projects have already gone on-stream and the balance three will be operational by the end of FY13.
If we see the financials of GNFC, FY11 sales were about Rs 2,850 crore, profit after tax was about Rs 266 crore. This PAT of Rs 266 crore included an insurance claim of about Rs 110 crore so there was other income of about Rs 110 crore in FY11. In the first nine months of the current financial year, GNFC has achieved sales of about Rs 2,700 crore which is almost similar to what it did for the full year. Profit after tax is about Rs 208 crore which is up by 60% over the same period last year, full year PAT can be in the range of about Rs 260 crore to Rs 270 crore which would result in an EPS of about Rs 17-18.
So at the current price of about Rs 83 the stock is discounted at a PE of less than 5. GNFC has been a regular dividend payer for the past 20 years. It has got an uninterrupted track record of dividends and last year paid about 32.5% which at the current price results in a dividend yield of about 4%. At the current price, I see safety in the stock and I don’t expect the stock to go down too much from these levels in case of a market fall but at the same time it has the potential to return about 30-40% in a timeframe of about six months to a year. Q: The other stock you have picked is Gati. What kind of targets do you have here and why do you like it?
A: I look at Gati from two perspectives; one is what is happening in the company and second is what is happening to the stock price and the valuations of the company. Gati is into four business segments; they have got an express cargo division which is about 70% of the total business. They have a coast to coast shipping business, they operate a few fuel stations and they also have an international business division. This company had an FCCB which was due in the month of December and was able to rollover the FCCB and it has been renewed by the FCCB holder Goldman Sachs.
A recent development which has happened which is good for its long-term potential is that Kintetsu Express of Japan has taken a 30% stake in the express cargo business. This express cargo business is a joint venture where Gati holds about 70% and Kintetsu holds about 30%. Kintetsu has paid about Rs 268 crore for acquiring 30% which values this business at close to Rs 900 crore. Gati had debt of about Rs 450 crore and the amount which is received from Kintetsu Express is going to be used to retire this debt. This itself will lead to cost saving of close to Rs 30 crore for the company.
If I look at what is happening in the stock price, prior to December the stock was hovering in the range of about Rs 55 to Rs 70. Because of the bad markets in December and also because of the fears in the market that Gati may not be able to repay the FCCB the stock got hammered and it came down sharply. After that in the month of February, when Gati announced the joint venture with Kintetsu, the stock saw a sharp run from about Rs 32 levels to Rs 48 levels at which point of time an FII which was holding close to 8% stake in the company he offloaded his entire stake in Gati Limited. Then because of the supply coming into the market, the stock has been hovering in the range of about Rs 32 to Rs 38 for quite some time. I feel that it may continue to hover in that range for some more time until full consolidation happens and the supply gets absorbed.
This maybe an opportunity for a long-term investor to buy this stock on every decline because if you look at the long-term potential of the business, with prohibitive cost of real estate in India, a lot of companies are following the online retail model, be it Flipkart or Letsbuy or people like Pantaloon and Reliance who are thinking of going online for the retail business. All this augurs well for the business of Gati.
Also Kintetsu has given it a valuation of about Rs 900 crore as against the market cap of the company is just about Rs 300 crore. Gati has also spun off its shipping division into a special purpose vehicle (SPV) and there is also a possibility of the company either giving somebody a strategic stake or going for an outright sale of the shipping division. In case that happens, that will lead to improve financials for Gati.
Over a period of time the possibility of Kintetsu acquiring a majority control of Gati Limited, that is a possibility which cannot be totally ruled out. In case of that happening that may lead to a major upward re-rating of the stock. But the next couple of weeks or months, the stock may take to consolidate because of the huge supply which has come into the market, it may be a good stock for a long-term investor to start accumulating and look for every decline to get into the stock. Disclosure: My family and I have a small position in the stock of GNFC. We don’t hold Gati Limited.