Buy Sunflag Iron: SP Tulsian

In an interview to CNBC-TV18, SP Tulsian of sptulsian.com shared his readings and outlook on the market and specific stocks and sectors.

Below is the verbatim transcript of the interview.

Anuj: What would be your stock to watch out for from the long term point of view?

A: I am recommending Sunflag Iron and Steel. This stock was recommended by me on July 10 at Rs 41 and the stock has met its target of Rs 51 even at that point of time giving 25 percent return already in about five weeks’ time. However, considering the excellent Q1 numbers having posted by the company, I reiterate my buy call because those who have bought earlier may be wanting to know the revised target whether to book profits or to exit at that point of time. So, again, after considering the good Q1 numbers posted by the company, I am reiterating my buy call on Sunflag Iron and Steel.

If you take the business model, they are making special steel rolling products with a capacity of about 3,60,000 tonne per annum and mainly catering to railways, auto ancillary, and defence. So, you can call it as an auto ancillary, you can call it as a defence play, you can call it as a metal play, and on all three we have been keeping positive bias. Coming on the Q1 numbers, the company posted topline of about Rs 530 crore with EBITDA of Rs 50 crore which was at Rs 32 crore in the same period of the Q4 i.e. on a quarter-on-quarter (QoQ) basis the growth has been shown from Rs 32 crore to Rs 50 crore on EBITDA front.

EBITDA margin ramped up from 7.2 percent to 9.4 percent; that is rise of about 220 basis point on a sequential basis and I am expecting that this trend of increase in the EBITDA margin is likely to continue for the next coming three quarters as well. PAT has been at Rs 25.5 crore which was Rs 12.5 crore; almost doubled or more than doubled with EPS of closer to Rs 1.40 for Q1 of FY18, while the whole of FY17 had an EPS of Rs 3.62. As I said, we have been keeping a positive bias on the metal stocks and maybe stocks like Sarda Energy which was recommended, even Sunflag Iron, on the similar lines I am expecting that probably company should be able to declare an EPS of about Rs 7 for FY18. If you take that call, it is ruling at a P/E multiple of 7.

Coming on the financial front also, on an equity of Rs 180 crore, the net worth is Rs 800 crore, while there is no debt at all on a net of working capital, if I take on a working capital and as well as on the long term debt. So, taking all this into account, with promoter stake of 50 percent, high net worth individuals (HNI) are holding 22 percent, and the best part is that the technical and financial collaborator, Daido Steel of Japan is holding 10 percent stake in the company as non-promoter. So 50 percent by promoter, 22 percent by HNIs and 10 percent by this financial and technical collaborator make about 82 percent. So, you have just 18 percent float with a market cap of closer to about Rs 900 crore or so. So I think that taking these into account, the share has good potential and I am giving a target of Rs 60 in next six months or so on the stock.