Ashish Chugh recommends 2 midcap stocks for investment

Investment Analyst and author of Hidden Gems Ashish Chugh is bullish on IL&FS Investment Managers and GVK Power & Infrastructure. He believes both these stocks have the potential to fetch good returns in times to come.

Below is the edited transcript of Ashish Chugh’s interview with CNBC-TV18 IL&FS Investment Managers IL&FS Investment Managers is a part of IL&FS group. This is the only listed private equity firm in the country. The company manages money for foreign investors typically on a 220 basis wherein it gets a fixed return of about two percent of the amount of funds managed. Also, there is a performance linked incentive of between 15-20 percent based upon the kind of returns which they generate for the investors after certain threshold. This company has been managing assets of close to about USD 3.2 billion and for the past couple of years it has been giving a consistent return of about 25 percent on the funds managed. If we look at the financials of the company, FY12 sales were about Rs 220 crore. Profit after tax was about Rs 75 crore. In the first nine months of the current financial year, sales are almost flat at Rs 163 crore which was same as the same period last year. Profit after tax is up by about 2.5 percent to Rs 55 crore. This company has been distributing roughly 40 percent of its profit after tax to the shareholders as dividend. It has been giving a dividend of 75 percent each year for the past three-four years. The company has a board meeting on 30th April for financial results and also declaration of dividend. So I believe that they may continue with a dividend of 75 percent or dividend of Rs 1.50 on a stock of about Rs 20 which means a dividend yield of close to 7.5 percent. On a long term basis, the performance of the company is a function of two things. One is the ability of the company to get fresh funds from the management and also the ability of the company to deliver returns to the investors. In the past few years, I think the investment environment has been extremely tough and still this company has managed a profit of Rs 70-75 crore, paid 40 percent profit to the shareholders as dividend. This translates into a dividend yield of about 7.5 percent on the current market price. I think as the economic environment improves and as the profits of the company improves, I think investors can expect better returns in the future. So here, I am basically betting on the pedigree of the management which IL&FS, I would say is an excellent pedigree. It has been a consistently performing company and the best part is that at the current market price, this company offers a dividend yield of 7.5 percent which in the current environment I would feel is an extremely good dividend yield. I would say this maybe a safe investment for investors who don’t want to take too much risk in the stock market. Disclosure: Ashish Chugh and his family have investments in both the companies. _PAGEBREAK_ GVK Power & Infra GVK Power is currently available at its lifetime low of about Rs 9. The current state of the markets is one of the reasons for its underperformance. Also the apathy of the investors towards power and infra stocks is looming on the stock. The important technical part is that this stock came out of the F&O category recently and I believe there was a lot of unwinding of long positions. This company is into four verticals. They are into power, airport, roads & highways and also natural resources. As far as power business is concerned, company has got 900 megawatts of operational capacity and about 4,000 megawatts of capacity which is under various stages of implementation. The basic fundamental problem with this power business of GVK is that the power plants are operating at very low plant load factors ranging between 20-50 percent on account of inadequate fuel supply. The company is facing shortage of coal. Coupled with that, the gas which GVK is supposed to get from ONGC and Reliance D6 is not happening. This is a major problem with regards to power business of GVK. As far as the airport business is concerned, company is currently operating at Bombay and Bangalore airport. They also have contracts for developments of two airports in Indonesia as well. So, there is a capital expenditure involved. Roads and highways are not really having smooth ride this time. The company has debt of close to Rs 15,000 crore. These are the negatives of the company. The positives are that the terminal two of GVK in Bombay is starting operations sometime in the month of September. This will not just increase the passenger fee but also boost their revenues from the rentals allotted to retail space. Besides, there is also an opportunity for unlocking of value in their real estate in Bombay. The company is taking all steps to basically reduce the debt or cut down capex in the future. This is evident from the latest agreement which they have done with Aurizon Holdings for their Australian project. This agreement essentially involves that Aurizon Holdings will fund all the capex related to this project. Secondly, the capex for the project will come down because Aurizon Holdings already has a rail network there. If you look at the valuations, last year, this company did a 13 percent stake buy in their Bombay airport project for about USD 231 millions. This values Bombay Airport at about Rs 8,500 crore. Similarly, the equities stake buy which they did for Bangalore airport project values Bangalore airport at Rs 4,500 crore. So the equity valuation of these two airport projects itself is about Rs 14,000 crores. GVK’s stake in these airport projects is valued at about Rs 7,000 crore. As against that, the market cap of the company is just about Rs 1,400-1,500 crore at the current market price. If you look at the financials of this company, in the first nine months, EBITDA is about Rs 510 crore. They have paid interest of about Rs 545 crore. So there is a loss of about Rs 30-35 crore after paying off interest. This is at a time when there is negativity all around, their businesses are not doing well, the power plants are operating at low plant load factors. So, in my case, the real concern is managing their debt and also surviving till the time the situation improves. So from that perspective, I would say this is an investment for somebody with an appetite for high risk. I believe this is a large company in a diverse range of businesses where the profit potential is very high even though the current environment maybe challenging. It is available at a lifetime low of just about Rs 9 because people are only looking at debt and the problems which the company is facing currently and not really visualising the possibilities which can be there. So I think GVK Power maybe an opportunity at the current price of Rs 9.