Multibaggers: Angel Broking picks Oriental Hotels, Apar Ind

In an interview to CNBC-TV18, Rajen Shah, CIO of Angel Broking recommends Oriental Hotels and Apar Industries as multibagger stocks. Shah is bullish on these two stocks because the downside is very low and the upside is likely to be huge.
 
Below is an edited transcript of Rajen Shah’s  interview on CNBC-TV18.

On Oriental Hotels Limited
On November 5, I was at ITC Grand Chola property, the 600 rooms super luxurious property of ITC at Chennai. It is a huge property and one gets lost in the property. I realized how this would impact the business of other hotels in Chennai especially Taj Coromandel which is a flagship property of Oriental Hotels. This month I was in Kolkata and met SS Mukherjee, Chairman of East India Hotels and someone who has 40 years of experience in the hotel industry. He told me about the huge opportunity that hospitality industry in India offers. He spoke about US having 37 lakh hotel rooms, China 17 lakh hotel rooms and India hardly 2 lakh hotel rooms. He also said that the occupancy and the average room rates are almost back to 2007-2008 levels, but huge employee cost, power cost and fuel cost has led profitability under pressure.
Only during times of severe competition, pessimism and gloom you get some stocks cheap. If you see Oriental Hotel Limited, you will find that this stock is extremely cheap. You would rarely find the hospitality company trading at one time the revenue. Looking at Indian Hotels, Rs 3,500 crore is the revenue and the marketcap is Rs 5,100 crore. So it is trading at about 1.5 times the sales. If you see East India Hotels, Rs 1,600 crore is the revenue and the marketcap is Rs 4,000 crore. So it is trading at 2.5 times the sales and for Hotel Leela Venture, Rs 600 crore is the income and Rs 1,200 crore is the marketcap. So it is trading at two times the revenue.
If you see Oriental Hotels Limited, it is trading a little above one time the revenue. So it is a very cheap stock. In the short-term ITC Grand Chola is going to impact its business of Taj Coromandel, which is a flagship property but this will be temporary. The prospects of the hotel industry are extremely bright over the next two-three years because today we are at around 5.5 percent growth and still we are back to 2007-2008 kind of occupancy in the average room rate. As soon as we move back to 7-7.5 percent kind of growth these stocks could be in action. So at Rs 21 there is hardly anything to lose.
Over the last 15-18 months, Oriental Hotels has spend almost Rs 150 crore on setting up a new property at Coimbatore, Vivanta by Taj at Coimbatore, plus a significant amount in renovating its Taj Coromandel property and expanding its property Fisherman's Cove at Chennai and besides this it also operates six other properties, all in south India. This stock has languished over the past 12 months, hardly appreciated and offers a decent opportunity. The downside on the stock is very low and the upside could be as high as 100 percent in about two-three years from now. Also Read: Market high on hope & hype, see muted 2013 returns : Kotak

On Apar Industries
On 23 December, 2011, I recommended a stock at Rs 102. The Sensex on that day was at 15,300 and today it is around 19,300. So, while the Sensex has moved about 26 percent, Apar has moved up by 50 percent in the past 12 months. We see a further 66 percent upside in the stock from the current levels of Rs 150, our target is about Rs 250 in the next 18 months and we have reasons for that. Apar is a manufacturer of aluminium conductors, transformer oil, specialty oil and cables. Aluminium conductor contributes around 40 percent to the total turnover, transformer oil and specialty oil contribute around 50 percent and cable around 10 percent. It enjoys market leadership in all the segments in which it operates.
The last 15-18 months have been terrible for every company associated with the power sector because of shortage of coal and related issues like the non-functioning of the government and fear on the part of government to address issues related to the power sector. All these issues have impacted the performance of all the power companies and power ancillaries as well. The government is now willing to act; the foreign direct investment (FDI) in retail is now a reality, indicating that the government is now determined to put this economy back on the growth track. So there is a significant rerating of infrastructure, construction and power sector on the cards. There will be a significant rerating of stocks in infra, power and construction.
Last week, I recommended Reliance Infrastructure and this time we look at Apar Industries. In the first six months Apar’s sales went up by 43 percent and profitability by 78 percent. This is despite the transformer oil segment not doing too well because of the dismal health of the State Electricity Boards, despite that it has reported a half yearly EPS of around Rs 12 and the management expects this good trend to continue for the next six months. So this year they should end with Rs 23 earnings and probably this could go up to Rs 27-28 in 2013-14, when the sentiment for this industry as well as orders from Power Grid starts flowing in.
At Rs 27-28 kind of earnings to give it a 9-10 kind of PE multiple, the stock has all the potential to go up to at least Rs 250. 18 months back Templeton picked up 10 percent stake in this company at Rs 220. Promoters along with eight entities own 91 percent of the company’s equity. So, the floating stock in the market is hardly 9 percent which is about Rs 55 crore.
Around two-three years back, there was a company Advanta India that had 93 percent of its equity cornered by the promoters along with eight players. So the floating stock was very low and when it started moving up in February, Advanta India was Rs 220 and now it is Rs 880. When action begins in these kind of stocks the rerating is huge. So Apar Industries could be one stock where the downside is very low and the upside could be very huge. Disclosure: We hold Apar Industries in our PMS. No holding in Oriental Hotels