Multibaggers: Angel Broking picks 2 small cap stocks

In an interview to CNBC-TV18, Rajen Shah, CIO of Angel Broking picks Swaraj Engines and Honda Siel Power Products as possible multibagger stocks. He feels investment in these stocks will yield better future returns.

Below is an edited transcript of Rajen Shah’s interview on CNBC-TV18.

On Swaraj Engines

There are plenty of opportunities in the small and midcap space. The market is loaded with this kind of opportunities and we have identified two today. One of them is Swaraj Engines. Equity is very low, hardly 12.5 crore and the stock is at Rs 450 and so the market cap works out roughly at around Rs 550 crore. So, this is a very small cap company.

This company is basically into two businesses; one is manufacturing of engines and supplying it to Mahindra & Mahindra (M&M) for its tractor business and the second is the high-tech engine product business. It is a small business and contributes hardly 5 percent to the total topline, 95 percent is from the engine business which it supplies to Mahindra. These two businesses are doing reasonably fine.

In the first half, Mahindra has not been able to put up a good show as far as tractor business is concerned but if one looks at Swaraj Engines’ numbers in the first half, they have done reasonably well; topline is about 12 percent and the bottomline is up 11 percent and the number of engines sold to Mahindra has also moved up. That indicates, Mahindra has started procuring more engines from Swaraj Engines. Mahindra sells about 2.5 lakh tractors every year and what they procure from Swaraj Engines in the current year would be roughly around 56,000-57,000.

This company has undertaken expansion in 2010 and at that point of time the capacity was 48 and they decided to hike to 60,000 initially and than too 75,000. This just got over so the engine capacity, production capacity has now been enhanced to 75,000 just few weeks back. So, the full impact of this expansion will be reflected in ’13-14 numbers where we are expecting the production of the company to move up by 20 percent. This year they should be selling about 56,000 engines to Mahindra.

Next year we are expecting it to go up to 71,000. So that will significantly add to the topline and the bottomline. As far as the high-tech engine component business is concerned the company is currently catering only to Swaraj Mazda SML ISUZU but now Mahindra is planning to procure even high-tech component for itself and for its new products which are being launched. This business will now start contributing decently to the topline. So net-net next year should be interesting, ’13-14 when we are expecting the EPS to move up from the current year expected at Rs 46 to about Rs 55 or so. This year we are expecting Rs 46 earnings, next year Rs 55. So at about 12-13 PE multiple we do expect the stock to touch Rs 650-700 in the next 15-18 months.

On Honda Siel Power Products

This is a low profile company, a small cap company. Equity is hardly about 10.4 crore and the stock is about Rs 630, so marketcap works out to be 640 crore. This company is a 67 percent subsidiary of Honda Motor Company, Japan and the free float is hardly 200 crore. So the liquidity in the stock is very poor. Any small buying leads to a significant rise in the stock price and we do expect significant buying happening in the coming months. This company is into manufacturing of three important products; one is the generators, gensets. The second business is water pump business and third business is the engine business.

Sixty percent of the company’s total topline comes from the generator business, 20 percent from the water pump business and about 13-14 percent from the engine business. The rest comes from few other small products. Coming to the first business which is the genset business, the company is seeing reasonably fine demand for its products.

As long as power prices in India continue to rise, companies like Honda Siel are sure to do well and currently the shortage is upto 10 percent. So Honda is expecting very decent topline from this business. Second, the government is planning to expand and integrate a number of social initiatives. This is all related to IT computerization and education. So this is going to see huge demand for our backup. The company should do well on that front as well; in fact it has started approaching a number of government organizations for the same. So, this should do well.

The company has recently launched a generator from its global portfolio and is picking up well. Full impact will be seen in the months ahead. The water pump business and the engine business are catering to the farm business, the agri business. The fortunes of these two businesses are dependent on how the agriculture does and we have seen firm food prices resulting in higher disposable income in the hands of farmer. So these two businesses are also doing very well. Last year they grew by 20 percent each, we expect the trend to continue this year.

The company has recently got into the tiller business. There are only a few companies in India that manufacture tiller. The company has recently started manufacturing a mini tiller from its long range of worldwide products. This tiller business is expected to pickup a strong momentum in the coming years, it’s very small, hardly contributes 5 crore to the topline. We expect an exponential growth from the tiller business in the coming years. So this is an interesting company to watch with a long timeframe. This year the company should be reporting 12-13 percent of topline growth and an EPS of about Rs 30 but next year this could zoom to Rs 40. We have a target of Rs 800 for this stock in the next 12 months.

Disclosure: We do not have any positions in the stocks discussed.