See 100% upside in Mahindra Ugine: Rajen Shah

See 100% upside in Mahindra Ugine Steel Company, says Rajen Shah, Angel Broking.

Shah told CNBC-TV18, "Mahindra Ugine is a very interesting company. I believe that it is all set to regain its lost glory. It had very good times in 2004-2008 period when every year, it used to report an average profit about Rs 45 crore. It had a very good past. After that because of the alloy steel business, the company was into trouble and still continues to be in trouble. But some interesting things have happened in the company and that is why we believe that this stock could be a Dark Horse and could give you about 100 percent upside in about 24-36 months."

He further added, "This company is basically into two businesses. One is the alloy steel business, which is a loss-making business and the second is stamping business, which is a profitable business. Because of alloy steel’s drag on the bottomline, the profits made by the stamping business were never reflected in the net figures that the company used to disclose. For the last three-four years, the company has been posting very nominal profit or losses."

"Six months back, the management decided to hive-off this alloy steel business into 100 percent subsidiary called Navyug Steel and then it offered 49 percent stake in this Navyug Steel to Sanyo Steel, which is a world renowned specialty steel manufacturer of Japan and 20 percent stake to Mitsui & Corporation. 49 percent stake was offered to these two Japanese players. Now Mitsui & Co is a comprehensive global trading partner across the world. It is a very good in this trading business."

"By doing this, the company has achieved three things. One is that, it got Rs 218 crore cash in to the loss-making alloy steel business and with this Rs 218 crore, it is planning to double its capacity of alloy steel from 1,20,000 tonne to 2,40,000 tonne over the next 18 months."

"The second thing is that it got Sanyo Steel and the management is talking about a complete re-vamp of this business. Henceforth, Mahindra Ugine will be called a super-specialty steel manufacturing company and not an alloy steel company. The third thing is that by getting into Mitsui, it will have no problems in marketing its additional 1,20,000 tonne of steel in the global market. That is one interesting thing which has happened."

"Coming to the stamping business, it is a highly profitable business. It has got about 3-4 units and it is currently operating at about 100 percent capacity. In fact, it has got so many orders that it has decided to put a new stamping plant in the southern part of the country to cater to Tata Motors and Ashok Leyland. Stamping should do very well."

"In fact, in stamping business we expect the net profit margin to be at least about 3 percent. Next year, it will be a Rs 1,000 crore business. So, we are expecting at least Rs 30 crore net profit in stamping business, which will result into the earnings per share (EPS) going upto Rs 10. Because of the alloy steel business posting loss, next year would not be that good. However, FY15, we expect the alloy steel business to turnaround. That is what the management is talking about turning around in 18-24 months."

"So when in FY15, the alloy steel business turns around and Mahindra’s stamping business post a profit of Rs 32 crore, which is very much possible, the EPS could go upto Rs 10. Around Rs 10 EPS, this subsidiary of Mahindra & Mahindra (M&M) should easily go to about Rs 120-130 levels."

"With very low downside, the upside is very high. We all know that M&M and Tata Motors are very aggressive right now. There is a huge pipeline of new products to be introduced once the auto market revives as far as M&M is concerned. I think it will have no problem marketing its stamping products. Great opportunity lies in this company."

Disclosure: We own Mahindra Ugine in our PMS.