Pick V-Guard, Essar Ports and Carborundum: Antique

Sandeep Shenoy, Head of Research, Antique Stock Broking talks to CNBC-TV18 about his cherry picks for the day. V-Guard offers good upside potential if the power capacity that is touted to come on board over the next few years materializes, he says. With Essar Ports, the demerger is a great trigger. By sheer size of operational ability, the company offers good potential. And as for Carborundum is concerned, it is a linear play on the industrial sector in India, which is definitely not going to ebb, he says.

Below is the verbatim transcript. Also watch the accompanying video
 
Q: Why do you like the V-Guard Industries story?

A: If you believe that the power capacity that is touted to be implemented over the next few years are going to come, there is definitely going to be ancillary or spill over demand for electrical goods or durables. V-Guard with its fiefdom of the South Indian market is now looking to make a foray into North India, which is outside its comfort zone.

Operational metrics for the company are good, the growth has been good albeit there has been some stretches on the working capital, but we feel that going ahead, when prices open, it is the non-traditional markets that will revert the operational metrics back to where it was two years ago. So the growth is there. Cash flow is going to be good and the working capital is going to be under control, so if you look at the entire piece for the market, be it the addressable side or on the input side, the company is in a very sweet position. Hence, we feel that this is going to be a good long-term CAGR story for any discreet investor.

Q: Do you have a price target on V-Guard?

A: On a longer term basis this can give you 25% CAGR at least for the next three years.

Q: It is a new entrant in its demerged form that you like the Essar Port story for?

A: We have been gung-ho on this company especially because of the demerger angle. If you look at it on a size and scale basis, this is quite a large company on operational basis. It would be handling around 160 million tonne capacity couple of years down the line. The capex are all being unfolded directly and there is no problem on the financial closure front. On utilization front too, the group companies would be able to give what we call as amortization of fixed cost business. So the marginal costing game would really stand in good stead when it starts seeking business from third party entry.

When you have everything in place, you have got all the blocks for a re-rating. Also, the valuation gap between this company and the largest player, which is currently quite stark, will get bridged in the next couple of quarters or maybe a year at the maximum. That leaves around 30-35% step-up rerating in place and from thereon, its going to be a smooth CAGR story.

Q: Your other pick is Carborundum Universal?

A: I believe the industrial activity in India is definitely not going to ebb. This is a company which can be said to be a linear play on it and also, it has got a substantial part of businesses both, on the output side and input side coming from abroad. Input side is going to give it a costing advantage on operational metrics front. Its ability to tap the Australian mining segment, also in other countries like South Africa or Russia, is going to stand it in good stead.

It managed to tackle the blip of 2009-10 quite commendably. So its operating margins are back on track. The implementation of capex shouldn