Why Ashish Chugh is betting on Mirza Intl, Gujarat Alkali

Investment Analyst Ashish Chugh is bullish on Mirza International and Gujarat Alkali. He sees both these stocks having the potential to fetch better returns ahead. 

Mirza International has seen a nearly a three fold jump in profit (PAT) on a quarterly basis. From the current price of Rs 20, the stock has no substantial risk and offers margin of safety. Long-term patient investor can consider this stock a multibagger, he explained in an interview to CNBC-TV18. 

Chugh expects Gujarat Alkali to remain range bound for some more time. He suggested investors to keep a small portion of this stock in their portfolios. The downside is extremely restricted and the upside potential could be substantial, he added. 

Below is the edited transcript of his views

On Mirza International

A: Mirza International has been extremely range bound for a period of three years with its high being about Rs 28. It touched Rs 15 at the lower end. It manufactures leather garments, leather footwear and accessories. It has got five manufacturing units, three are located in Unnao near Kanpur and there is one unit each in Noida and Greater Noida.

Their FY12 sales were about Rs 553 crore, up by 17 percent over FY11 and a profit after tax of about 35 crore, 10 percent down compared to FY11. In the first half of the current financial year, sales is up by about 11 percent to Rs 380 crore and profit after tax is almost flat at about Rs18 crore. But the good part is that there is a significant jump in profit after tax on a quarter on quarter basis. PAT in the June quarter was about Rs 3.5 crore, which has increased to about Rs 13.4 crore. It’s nearly a three fold jump in PAT.

There are couple of reasons we like the stock; one, it’s a fully integrated manufacturer of leather garments and leather shoes. It is taking regular capacity expansion and increasing the scalability and it sells its product under Red Tape brand. Till 2006, it had no domestic presence. It was a fully export focused company, but post 2006, it started focusing on the domestic market also given the large potential here. Today, the company has about 75 exclusive Red Tape stores. They have plans to expand it to about 150 to next two-three years.

As of today, the company derives about 65 percent of revenues from exports and 35 percent from the domestic market. In exports also about 15 percent of the total exports the company does in its own brand which is Red Tape and Oakridge. The other good points are that the company has never done any equity dilution; it has never done foreign currency convertible bond (FCCB) or qualified institutional placement (QIP) of any sorts. All the expansions have been funded either through internal accruals or through debt. The interest coverage for the company is extremely comfortable. Promoter holding is high at about 66 percent.

If one sees the stock price movement in the past three years, the stock has touched a low of about Rs 15 and high of about Rs 28. Earnings per share (EPS) on trailing 12 month basis is about Rs 3.25 paise, which means at the current price of Rs 20 the stock is traded at a PE multiple of just about 6.

At the current price of PE multiple of 6 the company is probably getting the discounting of more of a commodity company inspite of the fact that 35 percent of the total revenues on the domestic market and 15 percent of the export sales happen under its own brand.

The reason for this is that the financial performance of the company for the past few quarters has not been extremely encouraging, but one or two good quarters of financial performance and the stock has potential to get completely rerated. From the current price of Rs 20 I do not see substantial risk from these levels. This is a stock which offers margin of safety. At the same time for long-term patient investor this stock carries multibagger potential also.

Disclosure: Me and my family has investments in Mirza Intl
I have no investments in Gujarat Alkali.

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On Gujarat Alkali:

Gujarat Alkali has been extremely range bound and hovering between Rs 110 and Rs 160 over the last three years. It currently trades at about Rs 130. It is the second largest caustic soda manufacturer in the country and is located in Gujarat. It has got a market share of about 18 percent. Besides caustic soda, it also manufacturers various other chemicals like caustic potash, chloromethane, hydrogen peroxide and phosphoric acid - where it is amongst the top three manufacturers in India.

It has got its manufacturing facilities in Vododara and Dahej. It is undertaking several expansion projects. It has recently completed an expansion of hydrogen peroxide capacity last year in Dahej and is also undertaking expansions of the various other chemicals.

Its FY12 sales were about Rs 1,700 crore with a profit after tax of about Rs 153 crore. In the first quarter of FY13 it achieved sales of about Rs 438 crore, up by about 5 percent of the same period last year. Profit after tax is up by about 20 percent.

I would like to draw the attention to the valuations of the company. At the current price of Rs 130, this stock has got a market cap of about Rs 975 crore and a debt of about Rs 300 crore, which means the enterprise value of Rs 1,275 crore. Gross block of this company is over Rs 3,000 crore. Gross block is valued on historical cost, so there is a deep undervaluation there.

Second is, EPS on trailing 12 months basis is Rs 23, which means a PE of 6. Cash profit for FY12 was about Rs 300 crore, which means that their business is available at roughly four years of its cash profits.

It has been a regular dividend payer. It paid a dividend of 30 percent for FY12. Cash profit is Rs 300 crore when company’s various projects are under implementation. Once the projects which are under implementation go on stream and the full benefits of those are realized, cash profit is bound to go up further.

In the short-term company, will be a beneficiary of the buoyant caustic soda prices. In the long-term, I see the stock movement similar to what GSFC did about three to four years back. It was extremely range bound and suddenly it shot up three to four times from a level of Rs 100 to Rs 150. I don’t know what the triggers are going to be for Gujarat Alkali. This is a stock which provides margin of safety.

The triggers can come in the form of higher profits because of buoyant caustic prices and their other projects going on stream or the bigger trigger could be that any time Gujarat government decides to privatize this it then could be lead to a multi-fold increase. This is a stock which may remain range bound for some more time, I don’t know, but investors can keep a small portion of this stock in their portfolios. This is a stock where the downside is extremely restricted whereas the upside potential could be substantial.