Midcap Gems: Mudar Patherya bets on Pitti, Orient Bell

Despite the disastrous numbers reported by Pitti Laminations, investment advisor Mudar Patherya is bullish on the stock. He tells CNBC-TV18 that the crash in stock price post the Q1 results should be seen as a mispricing opportunity which should be bought into.

“At the end of the day, it is a company with market cap of between Rs 60-70 crore, it has revenue ammunition of about Rs 1,000 crore and a probability of EBITDA margins being more than 15%. So you are looking at a medium-term possibility of Rs 150 crore EBITDA and a market cap of Rs 60-65-70 crore,” he explained. Patherya is also positive on Orient Bell Ceramics. In this sector, Patherya points out an anomaly which he sees as a buying opportunity. Kajaria Tiles holds the largest market cap in the space, which is greater than all other companies in the sector combined. Therefore, he believes there is a mispricing opportunity over here as well. Furthermore, he believes the company has an EBITDA potential of about Rs 100 crore, with a market cap of only Rs 70-80 crore at the moment, and so it is an interesting opportunity. Below is an edited transcript of his interview with Udayan Mukherjee. Q: You have picked Pitti Laminations, why do you like that story? A: I owe a certain moral responsibility to the viewers of this programme because I had recommended this stock a few months back when the price was about Rs 40-42. The stock eventually moved to about Rs 90, but then we had the disastrous Q1 results and the stock has tanked to Rs 50-52 where it is currently. I think this is a very welcome mispricing opportunity. I am not saying that every stock has to tank like this, but in Pitti Lamination’s case it is a mispricing opportunity. At the end of the day, it is a company with market cap of between Rs 60-70 crore, it has revenue ammunition of about Rs 1,000 crore and a probability of EBITDA margins being more than 15%. So you are looking at a medium-term possibility of Rs 150 crore EBITDA and a market cap of Rs 60-65-70 crore. For somebody who wants to look at a little more short-term, let us not forget that the management has already indicated to analysts that they will maintain profits between Rs 25-28 crore post tax for the current financial year. After having reported only Rs 88 lakh as profit for the Q1, it means they have got to maintain 25-28% in the current financial year, which means the next three quarter have to give you Rs 8-9 crore per quarter. If you start annualising that, you get figure of about Rs 32-36 crore. So when the annualised figure is Rs 32-36 crore, with a market cap of only Rs 60-70 crore, that looks like an amazing opportunity. Besides, don’t forget that Pitti is the market leader in the area that it operates with a market share of nearly 90%. So it is not just any old company, it has solid management and it just had a bad quarter. Inventory with all their dealers has got cleaned out, which means restocking will happen in a couple of weeks going ahead. I would say it’s an amazing counter, excellent solid good growth coming up. You had a mispricing opportunity, let’s make the most of it. Q: So you think next quarter they will get back to run rate of Rs 8-9 crore PAT that you are talking about? A: If the management has committed Rs 25-28 crore, it would be very facile for me to ask them what they are going to report next quarter. They have given a guidance post the devastating results of Q1, so if you read between the lines, it indicates that things are back on track in the Q2. So talking of Rs 25-28 crore post tax for this full year, I think they should end up doing close to Rs 8-9 crore, which means they will probably get back to the run rate from October. The interesting thing that has been striking me is that on a reverse PE perspective, which means that for every decline in your profits what is the market tanking by, there is huge sensitivity on the decline but not a huge upside sensitivity, and that is great news for anybody picking stocks. On a decline perspective, for every crore they might have lost in terms of profits, the stock has tanked by ‘x’ amount of crores in market cap. Whereas, when it comes to adding back, they haven’t been able to add back. So when you look at value spotting, this is an excellent case. I am very happy this stock has declined, I have made my pickings and I think this is a great profitable opportunity. I hope they don’t report devastating results on frequent basis because that will eventually affect their long-term PE. But if they return to their run rate, this is a great opportunity. _PAGEBREAK_ Q: The other one you have picked is Orient Bell Ceramics? A: Orient Bell Ceramics is very interesting when you see from a sectoral perspective. There is a huge polarisation happening with the ceramic industry; Kajaria at one end and everybody on the other end. If you take all the other market capitalisations put together, they won’t even match up to Kajaria, which I think is anomaly and a mispricing opportunity from a sectoral perspective. Orient Bell I have chosen from a couple of perspectives. One, they have turned Bell around they bought it over. Bell had been reporting losses for a number of years, but they turned it around within first 15 months of acquisition. So it is telling me that it is an excellent and solid management that is one. Secondly, I see an opportunity in the high interest costs. When you say high interest cost, people back off, and I think that is the reason why the market cap of Orient Bell has remained depressed for a long time. It is one of the largest tile manufacturers in India, it has got demonstrated turn around capability, it has got an ammunition of about Rs 700 crore for this year and about Rs 1000 crore of ammunition is already been built into the system. Rs 1000 crore of ammunition around a 9-10% EBITDA margin gives you an EBITDA potential of about Rs 100 crore. You have market cap of only Rs 70-80 crore at the moment, so for me that is an interesting opportunity. Plus, if they ever decide to restructure the balance sheet and replace that, I think you will have a low gearing, which is really what has been troubling the stock. The stock has not been able to get to its true potential only because of the interest burden. The moment they restructure the debt rate, the moment they replace a little of the debt with networth, I think you will finally see a lot of traction in this counter. Q: Any disclosures? A: I hold nominal position in Orient Bell, but hold an interesting position in Pitti Laminations.