Multibaggers: Rajen Shah picks Kilburn Engineering, BILT

Rajen Shah of Angel Broking selected Kilburn Engineering and Ballarpur Industries Limited (BILT) as his multibagger stock ideas for the day. He sees limited risk and a decent upside in these stocks going ahead.

"Kilburn Engineering is grossly under valued. It should easily provide atleast 100% upside in 24 months if not more. The worst is over and with zero risk the upside could be huge in this company," he told CNBC-TV18. One needs to plan out entry and exit at the right time when investing in commodity stocks like BILT, he suggested. "I am seeing a very decent upside; this is not a stock which is going to give you sustained superior returns on a sustained basis. If you plan out your entry and exit at the right time then you end up making decent money in 24 months," he elaborated. Below is the edited transcript of Shah’s interview with CNBC-TV18. Also watch the accompanying video. On Kilburn Engineering A: This is a very low profile company. Exactly a year back this stock was quoting at about Rs 70 and today it is quoting at about Rs 24. So, the stock has cracked almost 65% from Rs 70 to Rs 24, it’s a 65% steep correction. The stock has corrected as if the company is going to shut down but that’s not the case, this is not Pentamedia or Silverline that it’s going to go down 90%. This is a McLeod Russel group company. It is basically into process equipment and food processing equipments. It has got very good cliental in the process equipment business and some of the clients are Reliance Industries, L&T, HPCL, BPCL, GNFC and GFFC. In the food processing equipment business it manufactures tea dryers. It supplies to group company McLeod Russel and most of the tea producers in the country. In the food processing business it is also into rice dryers and sugar dryers and supplies to most of the sugar companies in India. So, its not any Tom Dick and Harry company, but the way the stock has been hammered it looks like it is. The stock has cracked 65% and there is a reason but the reason is not so big that the stock should crack 65%. The company’s turnover last year came down by about 20% and the profitability by 90%. Now this is aberration, last year there were certain exceptional things which happened in the company. One was relocation of its plant from Bombay to Thane because of which the company’s operations were shut for almost about two months. There was almost nil or negligible production and sales. That is the reason the turnover came down by 20%. Profitability was hot because of certain exceptional expenses which the company incurred on account of all this. However, the company has very clearly mentioned in the annual report that once this new Rs 65 crore plant gets operational, which is now operational in commercial operation now the company’s turnover and profitability are bound to shoot up actually. Now that this Rs 65 crore new plant has stabilized, good days lie ahead for this company. We do own this stock in our PMS. We have estimated this company to report about Rs 120 crore of topline this year and earnings of about Rs 4.5-5, but next year that is for 2012-2013 we are expecting the turnover to shoot up to about Rs 140-145 crore and the EPS to go to as high as Rs 7.5-8. The stock is grossly under valued. It should easily provide atleast 100% upside in 24 months if not more. I would also like to mention here that the book value of the company is Rs 80. I wonder how can you get Rs 100 crore turnover company for a market cap of just Rs 31 crore. So, market cap at Rs 31 crore sounds too low. Just 12 months back the market cap was about Rs 100 crore, so the stock is headed for good times. The worst is over and with zero risk the upside could be huge in this company. On Ballarpur Industries Limited (BILT) We had recommended this stock sometime in 2009-10 at about Rs 25-26 and our target was Rs 45. It did touch Rs 41. Paper stocks are not those which would give you superior returns on a consistent basis, but they do provide good returns if one is able to time well ones entry and exit. BILT is such stock wherein you need to plan out your entry and exit at the right time. We did enter at about Rs 24-25, we did exit when there was upper circuit when the management came on the channel and spoke about, that was a day we booked significant profits on BILT. You need to get into these companies when they are going through rough times, turbulent times and exit when the times are turning to good. So, that is a strategy we follow in this kind of commodity plays. Last year was not too good for BILT. It is a June year end company so in March they completed nine months and for nine months they reported a 35% kind of drop in profitability. That is a reason why the stock has cracked almost 45%. Last year it was Rs 38, now it has come down to about Rs 21. It has corrected 45% and that is the reason why we like the stock because at this point of time I believe that the worst for BILT has been factored in. Over the last 6-9 months there are two things which have happened, one, 1.2 lakh tonnesof pulp manufacturing plant at Sabah forest in Malaysia has got operational and has now stabilized. Last month its 1.7 lakh tonne of pulp manufacturing plant at BILT has commenced operations. It may take couple of months for it to stabilize, but the management had very clearly mentioned in last years annual report that once this pulp manufacturing thing is into the play, margins will improve significantly. So far BILT used to buy pulp from the open market and there were times when it would not get it on time, there were times when it had to face the volatility. But now with integrated operations, margins are bound to improve significantly. For the current year from July onwards, we are expecting the EPS to shoot up from Rs 2.25 estimated for last year to about Rs 3 and next year Rs 3.5. Last time when the EPS was 3.5 year just two years back, the stock was at about Rs 40. So, there is a very decent upside and the risk is very low. Three years back the management bought Rs 38 crore shares at a price of Rs 25 which is above the current ruling price. Two years back the management took up 10 crore shares at a price of Rs 30 which is 50% higher than the current market price to raise their stake from Rs 40 to Rs 49. Last year when International Papers bought out Andhra Paper, they paid an EV of Rs 2.5 thousand crore for 2.5 lakh tonne paper manufacturing plant. BILT is a 1 million tonne paper plant available at a market cap of just Rs 1,370 crore. The capital employed in the business is Rs 8,000 crore. I am seeing a very decent upside, this is not a stock which is going to give you sustained superior returns on a sustained basis. This is a stock wherein you need to plan out your entry and exit at the right time and if you are able to do that successfully you end up making decent money in 24 months.