Investment Analyst Ashish Chugh suggests buying IT stock Nucleus Software and chemical company BASF.
Nucleus Software is a debt free company. Recent depreciation of the rupee against the US dollar and other currencies would be good for the company in the short to medium-term. The stock is available at extremely compelling valuations, he told CNBC-TV18 in an interview.
BASF India is a 73 percent subsidiary of BASF Germany, the world’s largest chemical company. The company is working on Rs 1,000 crore expansion plan in Dahej, which is expected to be operational in one to one-and-a-half year. This move will ramp up its production capacity and profitability, he added.
Below is the verbatim transcript of Ashish Chugh's interview on CNBC-TV18
Q: You have picked an IT stock today, Nucleus Software, why would you buy that?
A: Nucleus Software is currently available below its cash value and currently trades at about Rs 70 which gives it a marketcap of Rs 225 crore. This is a totally debt free company and as on March 31, 2013 the liquid cash in the books of the company is about Rs 265 crore. So, you have this company available at less than its cash value.
This is a company which caters to the banking and financial services sector and unlike other software companies this is a product company. One of its products is incidentally the world’s largest lending software so they have put in considerable years in developing these products and the company has operations in over 50 countries. They sell products to over 50 countries and derive roughly 50 percent of their revenues from Far East and South East Asia.
Looking at the financials of the company, the FY13 sales were about Rs 295 crore, which were up by almost 4-5 percent over FY12, profit after tax was up by about 28 percent to about Rs 45 crore, earnings per share (EPS) for the year is Rs 14 so at the current price of Rs 70, you are getting the stock at a price to earnings (PE) multiple of about 5.
I do not think the growth is exemplary. I would see flat growth for the past three years primarily on account of the conditions that we are seeing across the globe. However, given the fact that the stock is available at below cash value discounts that factors in the price, the stock is available at a PE multiple of just about 5.
The dividend yield is about 4.5 percent and the recent depreciation of rupee against not just dollar but also other currencies all across the globe would be good for the company at least in the short to medium-term. So, you have a product company where there are considerable entry barriers growing at steady rate and available at extremely compelling valuations.
Q: Why would you buy BASF India now?
A: BASF India is a 73 percent subsidiary of BASF Germany, which incidentally is the world’s largest chemical company. This company caters to variety of industry segment; they are available across and entire range of industry segment right from agriculture to paper, chemicals, fast moving consumer goods (FMCG), pharmaceuticals and also automobiles. This company has got plant at multiple locations; they have plant in Gujarat, Bangalore, Himachal Pradesh, Kolkata, Mangalore, Mumbai and Rajasthan.
We have a number of multi national companies (MNCs) that are operating in India and in many cases they have listed company and along with companies that are 100 percent owned by their parent company. This generally leads to a conflict of interest and there is always a concern among minority investors that the more profitable business will be routed through their 100 percent subsidiary.
In case of BASF, over the past two-three years, they have reduced conflict of interest; they have merged all their private companies that were operational in India with the listed company thereby reducing the conflict of interest and also the concern in the minds of minority shareholders. So, this move in the long-term is good for the minority shareholders of BASF India. The company is now working on Rs 1,000 crore expansion plan in Dahej where they are putting up large capacity, expected to be operational about one to one-and-a-half year from now. Therefore, this expansion when complete will significantly ramp up the company’s production capacity and also the profitability.
Looking at the financials of the company, FY13 sales were about Rs 3,500 crore, which was up by 12 percent over FY12, profit after tax was about Rs 115 crore, which was up by 13-14 percent. The marketcap of the company is about Rs 2,300 crore. So, you are getting this company at a PE multiple of about 20. As far as the valuation is concerned, the stock may not look extremely cheap or compelling but with the increased commitment of the parent company in the Indian market and the massive production ramp up which they are undertaking. The stock is also available close to Rs 535 and is available at close to its 52 week low, which reduces the risk at least in the short-term.
Disclosure: Ashish Chugh and his family may have small investments in Nucleus Software but no positions in BASF.The Great Diwali Discount!
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