Multibagger ideas: PN Vijay's 2 attractive bets

Portfolio manager PN Vijay has picked up Hikal and Mahindra & Mahindra Financial Services as his multibaggers for the day.

Hikal, he says, may see about Rs 700 in the next 12-15 months. M&M Financial, he has a price target of about Rs 1,100 in the next 12 months. Houseviews: Expert tips to trade Infy, L&T, TTK Prestige & HDFC Bank Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy. Q: Why do you like Hikal? A: Hikal is a midsize company. It develops R&D and then manufactures molecules, which are intermediates for pharmaceutical and crop sciences industry. About 70 percent of its turnover is directed towards the pharmaceutical sector and about 25 percent to crop protection. It started a contract research and manufacturing services (CRAMS) business and made a lot of investments. The company is promoted by the renowned Baba Kalyani Group and Hiramath, an entrepreneur. The great thing about Hikal is its production specialisation; in fact one of its products, Gabapentin, accounts for 45 percent of the world's turnover. The unique advantage of this is that it has got very-very strong relationships with its multinational clients. In a year that just ended, Hikal had a turnover of about Rs 708 crore and made a profit of slightly over Rs 6 crore. The trigger for Hikal is the substantial investment it has made in capacity, especially in CRAMS. This capacity will get to fruition from now on. So, one is expecting a strong increase in the volume and the profits in the years to come. In terms of valuations, Hikal is very attractive. It is trading at marketcap to sales of something like 0.98; Divi’s Lab is at about 7.5. Even on EV/EBITA basis, Hikal scores very well compared to all its competitors with EV/EBITDA of just 5.6; Divi has about 14 or so. Hikal is a highly profitable, high EBITDA, 25 percent plus dividend paying company. The risks in the stock are a bit of client concentration. Its major clients accounts for about 75 percent of its turnover and relatively high debt. But I am not too worried about the high debt because this has been done to increase capacity, which will now pay-off. The stock is quoting around Rs 425. I expect the stock to reach about Rs 700, as a target, in the next 12-15 months. Q: What about Mahindra & Mahindra Financial Services? A: Mahindra & Mahindra Financial is a much known non-banking financial companies (NBFC). It is part of Anand Mahindra group. It is essentially in the automobile sector. In its disbursements, about 32 percent is accounted by cars, another 28 percent by utility vehicles and about 20 percent by tractors. The company has been growing phenomenally. If you see its cost of funding, about 48 percent of its funding is from banks and about 26 percent from the bond market; rest is through securitisation of its loan assets and short-term commercial paper. In the quarter that ended, it had an excellent quarter. The net interest margins went up by almost 200 bps to 10 percent, which is very high NIM for any finance company. The net interest income (NII) went up about 47 percent. There was slight slippage, which is seasonal. Asset quality is not a problem for M&M Finance. The trigger came for a stock recently when it sold about 12 percent odd of its stake in its 100 percent subsidiary Mahindra Insurance Brokers for about Rs 65 crore to Leapfrog, a private equity investor, at an astounding price earnings valuation of 38. That immediately led to an upward revision in the valuation of this subsidiary company. Going forward, I expect M&M Finance to do even better because generally the cost of capital for NBFCs is coming down as interest rates gradually come down in the market. It is trading around Rs 883 or so, which is about 11 times forward earnings. I would give this one of the better managed NBFC companies in India a price target of about Rs 1,100 in the next 12 months. Disclosure: I have no personal holding in the stocks discussed.