Buy Mcnally Bharat Engg, says Ashish Chugh

Mcnally Bharat Engineering is a value buy from the capital goods sector, says Ashish Chugh, Investment Analyst & Author of Hidden Gems

Chugh told CNBC-TV18, "Mcnally Bharat Engineering is a stock which belongs to a sector which is out of favour right now. It is a contrarian stock I would say in capital goods sector which is not really the flavour of the season, but then the valuations of the company have become quite attractive."

He further added, "There was a time when these capital goods companies used to trade at a PE multiple of 20-25. Now you find many of them available at 4-5 PEs, Mcnally Bharat being one of them."

"This is a company which started off as a material handling company. They were doing projects for the material handling space, but they have of late diversified to become a conglomerate and have a wide variety of services in the Engineering, Procurement and Construction (EPC) segment and they cater to power, cement, mining, coal washery and variety of other industries."

"Talking about the negatives, first is that the capital goods cycle currently is slow and in the short-term it is putting a pressure on the companies in the capital goods sector. In case of Mcnally Bharat the receivables is high, because a lot of their payments have got delayed. This has led to increase in the short-term borrowings of the company and if you see the balance sheet there has been an increase in short-term borrowings."

"Coming to positives in spite of the slow capital goods cycle this company has been witnessing good order flows on a regular basis. The order book of the company currently stands at about Rs 4,000 crore which is to be executed over the next 24-36 months and in light of that if you look at the market cap, the market cap of the company at the current price is just about Rs 250-260 crore."

"If you look at the valuations of the company FY12 profits were about Rs 67 crore which is EPS of Rs 21. So at the current price of about Rs 84-85 you have this stock available at a PE multiple of just about 4. The cash profit was about Rs 90 crore, so you have this company available at less than three years of cash flow. Book value is Rs 115, current market price is Rs 85, so you have a 50 year old company available at a discount to book value."

"Talking about the business I think the sheer diversity of the projects which McNally Bharat is capable of handling, I think the only other company you can see with that kind of a diversity is Larsen and Toubro (L&T), so there is a vacuum in between."

"When the capital goods cycle turns positive, I think companies like McNally Bharat will be hugely benefited. Of course there are challenges in the short-term and till the time investment starts to pick up aggressively in the economy there may not be too much of traction in these companies. So I think the real benefit will come once the economy turns around, but in case of McNally Bharat the good part has been that they have been able to survive and they have been able to manage these orders on an aggressive basis, because there has been an increase in the order flow."

"At the current price this stock is traded at almost two years low. So the negatives with regard to the sector and with regard to the company look factored in the stock price. So I feel this is a value buy from the capital goods sector, a sector which is currently out of favour and available at very attractive valuations as of today."

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