Hidden gems: Eimco Elecon & DCM Shriram Consolidated

Ashish Chugh, investment analyst, recommends a ‘buy’ on two companies in the current market- Eimco Elecon and DCM Shriram Consolidated. Talking to CNBC-TV18, he says that looking at the valuations at which Eimco Elecon is now available, the risk-reward ratio is skewed to recommend a buy. As for DCM Shriram Consolidated, he says it is a well-run company into a variety of businesses, having managed a turnaround and also available at extremely attractive valuations.

Here is the edited transcript of his interview with CNBC-TV18

On Eimco Elecon

This is a small company which is a part of the Elecon Group. It caters mainly to the mining and construction sector. Since both sectors are currently facing difficult times, I would say that this is a contrarian stock with high risk. However, looking at the valuations at which the company is available now, the risk-reward is skewed in favour of the latter. If you look at the financials of this company, FY12 sales were about Rs 180 crore and profit after tax (PAT) was about Rs 20 crore. This Rs 20 crore included an extraordinary income of about Rs 8-9 crore which accrued when the company sold a part of its business. In the first nine months, the company has achieved about 3 percent growth in sales at about Rs 123 crore, PAT is about Rs 12.7 crore, slightly down by about 10 percent compared to same period last year.

But the fact to be mentioned is that this profit does not include the extraordinary income which was there last year. This company has a small equity of Rs 5.77 crore, which means the earnings per share (EPS) for nine months is about Rs 22. There are a couple of other reasons we like this stock. One is that this company has got an uninterrupted track record of dividend for the past 20 years. The company paid 40 percent each year for the last five years. Also, it is totally debt-free.

Another thing is that in the past 15 years, this company has not done any equity dilution or fundraising. The promoter stake is high at about 74 percent, and the best part is that the stock is available close to its three-year low at about Rs 155. The important part is the valuation of this company now. The stock currently trades at about Rs 155 which means market cap of the company at the current price is about Rs 90 crore.

This company is totally debt-free as I mentioned, and as on March 31, 2012, it had net current assets of about Rs 85 crore. This actually means that the company being debt-free, the market cap is almost equal to the net current assets. This means that you are getting the business virtually free. If I tried to be more conservative, out of these net current assets of about Rs 85 crore, the company has cash and cash equivalents of about Rs 55 crore alone. If I add the profit for the first nine months which is about Rs 12.5 crore, I get a cash and cash equivalent of about Rs 67-68 crore. This means that I am getting this business for a valuation of about Rs 20-25 crore. 

This is a business which is doing a PAT of about Rs 15 crore in times which are considered tough for the user industry. So I think we are in a time where not many people are interested in small caps but it is only during these distressed times that you are getting well-managed businesses below their cash values. So these are extraordinary times but it does throw up extraordinary opportunities, and Eimco Elecon is probably one of those opportunities.

Disclosure: I have no personal investments in Eimco Elecon.

On DCM Shriram Consolidated

This is a diversified company in a broad range of businesses. This company is primarily into chlor-alkali business. It is also into various agri businesses like hybrid seeds, fertilisers and has a rural retail chain by the name of Hariyali Kisaan Bazaar. Besides this, the company is also into cement, sugar and building systems, division by the name of Fenesta.  This company has managed a turnaround in the first nine months of the current financial year, which is primarily on account of two factors. One is that the margins in the chlor-alkali business have increased and profits have doubled. The second major factor is that the losses in the Hariyali Kisaan business, which were eating the profits of the other business segments, have come down significantly.

You have a turnaround company available at extremely attractive valuations at the current price of about Rs 55. If you look at the financials of the company, FY12 sales were close to Rs 5,000 crore and PAT at about Rs 12 crore. In the first nine months of the current financial year, sales are up by about 10 percent to Rs 4,100 crore and PAT is about Rs 120 crore, as against a loss of Rs 37 crore for the same period last year. Cash profit is about Rs 290 crore.

This turnaround has been because of higher profits in the chlor-alkali and sugar business, and also the losses in Hariyali Kisaan Bazaar have come down from about Rs 90 crore to about Rs 34 crore. Other important factor is that in this quarter, losses have come down further to about less than Rs 4 crore from about Rs 40 crore for the same period last year. Market cap at the current price is about Rs 900 crore and cash profit for the first nine months of the current financial year is about Rs 290 crore. So you have this business which is available at less than three years cash flow. The point to be noted here is that this company is present in a variety of businesses, many of which are large-scale businesses having economies of scale and all are integrated in terms of their power requirements.

They all have captive power generation. This company has been a regular dividend payer for the past 20 years. Though now I would say that in the past three-four years the quantum of dividends has been small on account of the problems which the company was facing.
The company has not done any equity dilution in the last 15 years. They just gave a bonus to existing shareholders in 2005, as against a book value of about Rs 80. The stock currently trades at about Rs 55. Since most of its businesses are fairly large, potential unlocking at a later stage is something which cannot be totally ruled out. Promoters have been buying the stock for the past one-and-a-half years from the markets on a regular basis. They have increased their shareholding to about 62.5-63 percent from about 56 percent two years back. So, in short, I would say this is a well-run company into a variety of businesses, having managed a turnaround and also available at extremely attractive valuations.

Disclosure: I have investments in DCM Shriram Consolidated.