Accumulate Good Luck Steel Tube around Rs 20: Ashish Chugh

Accumulate Good Luck Steel Tube around Rs 20 with a long-term perspective, says Ashish Chugh, Investment Analyst & Author of Hidden Gems.

Chugh told CNBC-TV18, "Good Luck Steel Tubes is amongst a number of small cap stocks which is available at throwaway valuations and I think the major risk associated with investment in this stock is the risks which are associated with investment in small cap stocks, mainly liquidity risk and also the impact cost maybe high."

He further added, "This is a Uttar Pradesh based company, which manufactures steel tubes and steel pipes. They cater mainly to the structural engineering sector, the automotive sector and also engineering goods sector. This company does a revenue of close to Rs 700-750 crore and about 25 percent of the revenue is constituted by export sales. They do an export of close to Rs 200 crore."

"If you look at the financials of the company, FY12 sales were about Rs 680 crore. Profit After Tax (PAT) was about Rs 20 crore. In the first nine months of the current financial year, sales are up by about 47 percent to Rs 725 crore and PAT is up by close to 10 percent to about Rs 19 crore."

"There are some things which we like about this company even though this is a company with a market cap of just about Rs 37 crore, one is that this company has been continuously growing for the last many years. If you talk about the last five years the Compounded Annual Growth rate (CAGR) in sales and profits has been close to between 15-20 percent. This company did about Rs 9 crore in 2008 which has increased to Rs 20 crore in 2012."

"The other thing is that there has been a continuous addition in gross block year after year. The gross block of the company which was about Rs 58 crore in 2008 has increased to Rs 110 crore in 2012 and also there is a capital work-in-progress as in the balance sheet of March 2012. So there is a continuous capacity creation."

"The good part is that all this capacity has been created without any equity dilution and through small addition in debt. The equity of the company is very small at about Rs 3.74 crore and since the time the company came out with its Initial Public Offering (IPO) in 1995 there has been absolutely no equity dilution."

"The long-term debt is at manageable level, very small debt of about Rs 25-30 crore and the company has got a 20 year track record of payment of dividend. The only time it skipped dividend was in 1999 and 2002. So besides these two years the company has been regularly paying dividend to the shareholders. Even though the quantum of dividends is not very high, but that has to be seen in the light of the fact that all the capacity creation has happened without any equity dilution and only through internal accruals."

"Promoter holding is high at about 71 percent. A short-term negative in this company is that of late there has been an increase in the short-term borrowings of the company, however if you see the balance sheet closely this is secured against inventories and receivables. Having said that, this definitely puts pressure on the margins of the company since the interest outflow is higher."

"In spite of the negatives which I have talked about you have a company doing revenues of about Rs 1,000 crore, doing a PAT of about Rs 22-23 crore and available at a market cap of just about Rs 38 crore, so you are getting this company at a PE of about 1.5."

"Whether you see this company on a standalone basis or you compare it with the peer group companies like APL Apollo Tubes you find a huge valuation gap and from Rs 20 the only risk maybe that you may not be able to see price appreciation in the short-term or you may not be able to get liquidity in the stock, whether it is buying the stock or selling the stock, but I think any price below Rs 20 or around Rs 20 maybe a good level to just slowly accumulate this stock for a long-term."

Disclosure: Me & my family have investments in Good Luck Steel Tube and Mcnally Bharat Engg.