Crazy not to invest in Granules, Infinity Comp: Patherya

Two midcap gems that investment advisor Mudar Patherya bets on are Granules India and Infinte Computer Solutions.

In an interview to CNBC-TV18, Patherya says that both these companies are riding on strong fundamentals and a weak rupee, which itself works in favour of these stocks. The fact that Granules is growing revenues by 50-60%, all on its own accruals and debt, and that it is evolving towards the API division is what attracts Patherya. “The value will start becoming increasingly evident from Q2 of the current financial year, by which time the impact of the expansion the trebling capacity in finished dosages and more than doubling capacity in pharmaceutical formulation intermediates will be evident, so this is an amazing story,” he explained. On the other hand, he has two main reasons for going with Infinity Computer. One is that the cash and cash equivalent with the company is more than its market cap. However, the yield offered by the company is what tips Patherya in favour of this stock. “The stock is at about Rs 80-85 and the dividend announced was Rs 8.50, which gives a yield of nearly 10%. So rather than put one’s money into a non-risk instrument where it stays locked in at that level, you actually buy into risk security with 10-11% yield,” he said. Another reason for going with Infinity is the fact that they have beaten their guidance the past few years. “One would be a fool not to consider this, irrespective of whatever happens. I am getting 10-12% yield plus growth, so the costing of my purchase keeps going down, not marginally, not incrementally but significantly,” he said. Below is an edited transcript of his interview with Udayan Mukherjee. Also watch the accompanying video. Q: Granules India is your first pick today? A: Granules India is a very interesting story because with a market cap of Rs 180 crore, you are getting a company which has more than 50-60% growth in revenues in the current financial year. It has increasing margins and an evolving revenue profile; from active pharmaceutical ingredients (API), it has now moved towards finished dosages which should give you very strong discounting on the markets. Add to the fact that it is doing all this without touching its equity, which means out of accruals and debt. I think that makes it a very compelling story. Coming to the financials, we are looking at an EBITDA of Rs 150-160 crore on a marketcap of Rs 180-190 crore. The value will start becoming increasingly evident from Q2 of the current financial year, by which time the impact of the expansion the trebling capacity in finished dosages and more than doubling capacity in pharmaceutical formulation intermediates (PFIs) will be evident. So this is an amazing story. Q: Are there any risks in this, do they have a bad balance sheet or any promoter issues? The marketcap to EBITDA is just about one time, why would the stock be trading at this valuation? A: If you look into the business model of Granules, the stock has been misinterpreted as an API manufacturer. There is nothing wrong in the way Granules runs its API business, one should look into it as a case study. The market dismisses it as a commodity manufacturer, which is great for people like me because I am looking at an excellent value. This value may not last long because the stock will go up, but it’s an amazing company. Q: The other one you have picked up is a technology, Infinite Computer Solutions? A: I have always wanted to look at a stock which has got a combination of high growth in revenues, very good margins, excellent marquee client and above all excellent yield. This counter comes after years of study. There are two things that struck me; first is that the cash and cash equivalent lying with them is Rs 155-157 crore plus a three month receivable cycle of Rs 250 crore. So Rs 250-260 crore plus Rs 150 crore of cash and cash equivalence gives you Rs 400 crore on the books, and you have a market cap less than that. Second is yield, which is where I feel it’s an incredible company. The stock is at about Rs 80-85 and the dividend announced was Rs 8.50, which gives a yield of nearly 10%. So rather than put one’s money into a non-risk instrument where it stays locked in at that level, you actually buy into risk security with 10-11% yield. There is another interesting aspect, which is the guidance. If one looks at the guidance the company has given, this company has beaten the guidance over the last couple of years. If one looks at the guidance for FY12-13, it is nearly Rs 1400 crore of topline and 12% EBITDA margin, which gives you an EBITDA of nearly Rs 200 crore. Let us assume that the net is about Rs 145 odd crore as per their guidance. At Rs 145 crore, it means that the 30% of profit is paid out of dividend. Incidentally, they have committed that their dividend payout ratio is going to be 30%. So we are looking at a payout of nearly Rs 10 per share, which is a yield of 12%. One would be a fool not to consider this, irrespective of whatever happens. I am getting 10-12% yield plus growth, so the costing of my purchase keeps going down, not marginally, not incrementally but significantly. In addition to established fundamentals, both counters that I mentioned today are ridinga weak rupee. Nobody in this country believes that the rupee is going strong. I think Infinite must have done all its projections and guidance based on rupee at 50-52 to a dollar and we have rupee which is 54 to a dollar. So even the guidance is a bit on the conservative side. Q: Any disclosures? A: I own both the stocks discussed.