Limited downside in Swelect Energy: Ashish Chugh

See limited downside in Swelect Energy, says Ashish Chugh, Investment Analyst & Author of Hidden Gems.

Chugh told CNBC-TV18, "Swelect Energy Systems was earlier known as Numeric Power. It sold its uninterruptible power supply (UPS) business to a French company called Legrand for a total consideration of about Rs 837 crore. This happened in the month of May 2012. UPS business contributed roughly 85 percent to the total revenues of the company."

He further added, "After the sale of UPS business it is now left with businesses which currently do revenue of about Rs 80-100 crore. While analyzing Swelect, I am looking management’s capability to scale up businesses, their attitude towards minority shareholders, risk concerns in the stock and valuation."

"Talking about business which it is left with and the future focus areas for the company, this company has got businesses which do a revenue of Rs 80-100 crore, these are the residual businesses and they are profit making. It has got plans to venture into a solar business and LED business."

"They also have plans to significantly scale up both of these businesses. In the past, this company has managed to make Numeric into largest UPS company and have managed to sell that business to Legrand at a very good valuation, which talks about scale up capability of the promoters. On that count, I would be positive on the company."

"In many cases when companies sell significant part of their businesses the shareholders get in return is very small amount as dividend and many of these companies choose not to distribute dividend on one pretext or the other. In case of Numeric, they have chosen to give 1200 percent dividend, which is Rs 120 per share along with 30 percent regular dividend which they have been giving."

"So, the total payout to shareholders including dividend distribution tax is close to Rs 145 crore, which is roughly 20 percent of realizations they got from Legrand after payment of tax. So, the company has chosen to maintain a balance between deployment of money and also payout to minority shareholders."

"If one sees the dividend track record of the company, since 1996, from the time of their initial public offering (IPO) it has been a regular payer of dividend and they have got a track record of uninterrupted dividend payments. So, the attitude towards the minority share is extremely balanced."

"My main concern is whether Rs 500 crore, which is lying in the balance sheet or the bank account of the company will be effectively and properly utilized. The other concerns are related to whether they will be able to scale up businesses the way they have done in the past. So, there are execution concerns."

"This company is almost debt free now. At the current price of Rs 140, the market cap is about Rs140 crore. It has got equity of about Rs 10 crore. After payment of dividend and taxes, it is left with cash and cash equivalent of close to Rs 500 crore. The market cap is just about 30 percent of the total cash lying in the books."

"The stock provides margin of safety. The valuations are extremely reasonable and they take into account some negatives which I was talking about. In the short-term, I don’t see too much of downside from the current levels of about Rs 135-140. But over a longer term if the management is able to show their capabilities and are able to scale the business to a certain level, the stock can give good returns to the investor."