Multibagger ideas: PN Vijay's 2 attractive bets

Portfolio manager PN Vijay has picked up Rural Electrification Corporation (REC) and RS Software as his multibaggers for the day.

Also read: Dipan Mehta bets on banks, capital goods; picks stocks Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy. Q: Why do you like REC? A: REC is a very good buy fundamentally. It could easily give you excellent returns. It is a government finance company. If you look at its borrowing profile, it gets about 90 percent of its money from tax free bonds and taxable bonds and a little bit of financing from financial institutions and banks. Its cost of capital is low, around 8-8.5 percent. Its disbursements are essentially to state and central government entities, more to central government entities, about 90 percent. Last quarter, it had very decent earnings. Both its top-line and bottom-line went up by about 25-30 percent. Its NPAs were very low at about 0.46% that is because most of the revenues, which are coming to REC, are escrowed. They are put into special bank account under letters of credit. Irrespective of the financial situation of the borrower, they get the money. The net interest margin was quite impressive at 4.5 pecent. It is quite high compared to banks. Going forward, the big trigger for REC is the restructuring of the major state electricity boards. A lot of cash will come back to REC. The lingering fear of NPA will be a thing of the past. It will get institutionalised in the next two-three months. That should give a big trigger to both REC and PFC. It is trading around Rs 225. I am expecting earnings per share of about Rs 35 in 2012-13 based on current earnings. So, it is trading slightly below seven times earnings. Given the earnings growth, I think it’s very attractively priced. It is a well run company with low NPAs and strong NIM. The only trigger risk factor is that there could be a delay in implementation of this power reform. That is unlikely. But if that happens, the stock may not move up the way I think it will. Q: What about RS Software? A: This is a Kolkata based midcap IT company. It works in a very interesting space. It works in an enterprise space where it provides fraud detection processes and payment processes to the industry. Its main clients are the credit card companies like Visa, MasterCard, American Express and others. It has almost got a monopoly in that market. With the increasing use of credit and debit cards and internet based commerce, they are in a winning streak and they should have huge earnings growth in years to come. They reported top-line growth of about 40 percent for the year as a whole 2011-12. This growth has only accelerated in Q1. I expect this growth to continue. They may have an earnings growth of about 40-45 percent in this financial year. The stock trades around Rs 175. On a trailing 12-month basis, it is about 6.5-7 multiplier. When you compare to the earnings growth, it is very attractive. The risk factor in the stock is that it’s a midcap and is subject to vicissitudes of midcaps and it has run up a lot. It has more than doubled in the last six-eight months. So, one has to watch out for some profit taking, though it is very attractively priced. Apart from that, I don’t see any great business risks in this stock. I give it a target of about Rs 325 in the next one year.