Rajen Shah's multibaggers: Mahindra Ugine, Shanthi Gears

Rajen Shah, chief investment officer, Angel Broking selects Mahindra Ugineand Shanthi Gears as midcap multibagger stock ideas for the day. According to Rajen these stocks have the potential to earn better returns ahead. "In 2012-13 the turnover of Mahindra Ugine will be about Rs 2,000 crore. Profit could be as high as Rs 30 crore resulting in an earnings per share of about Rs 10. I am exceptionally bullish on this company from a little longer term perspective." "Shanti Gears is low profile gear making company based in Coimbatore. This company was doing very well in 2008 and 2009. Both these years it reported approximately Rs 250 crore of turnover and about Rs 45 crore of net profit. This year the company will report about Rs 4 kind of earnings. But next year I do expect a repeat of 2008-2009," he added. Below is the edited transcript of Shah's interview with CNBC-TV18. Also watch the accompanying video. On Mahindra Ugine This company trades at about Rs 47. Between 2004 and 2008 the total net profit made Mahindra by Ugine in these four years was Rs 187 crore which is more than the current market cap of the company. The aggregate profit works out to around Rs 46 crore per year. At that time the aggregate turnover in this period was Rs 700 crore. On Rs 700 crore the company used to report Rs 46 crore of aggregate profit. Today the turnover has more than doubled but the profit is not even Rs 5-10 crore. In this long time the turnover has doubled. It’s almost four years since 2008. The company is into alloy steel which is doing reasonably well. Its stamping business is likely to do exceptionally well because the capacity of stamping business is likely to move up by about 60-70% over the next two years. They are setting up a new plant at Pantnagar which were catering to Telco and M&M. Their ring business, which is a small business about Rs 30 crore is also doing reasonably well. Since the power cost in this business is very high the company has invested about Rs 14 crore in Wardha Power Company. The Wardha Power Company will commence operations anytime now and this is going to reduce its power bill substantially. So we have worked out that in 2012-13 the turnover will be about Rs 2,000 crore. Profit could be as high as Rs 30 crore resulting in an earnings per share of about Rs 10. I am exceptionally bullish on this company from a little longer term perspective. Its capacity expansion will come into play in 2013-14, then EPS could go as high as Rs 15 which was the EPS between 2004 and 2008. At Rs 15 kind of EPS the stock can easily touch Rs 115 in about three years from now. It is a Mahindra Group company. I was amazed to see XUV500 which is an international product coming from Mahindra Group. The future of this group is very bright. Companies like Mahindra Ugine should do exceptionally well because they are catering to the group companies besides other permanent companies. It is surely a multi-bagger in the making. On Shanthi Gears Shanthi Gears is a very low profile Coimbatore based company which makes gear, gear boxes. These are all specialised gears and some of them find application in Airbus and Boeing. This company is currently headed by P Subramanian who has got a very clean track record. He is a person of very good integrity and does a lot of philanthropic activities in South. Last year he gifted about 473,000 shares of Shanthi Gears to its 473 employees, 1,000 shares each to each and every employee. These are no ESOPs but gifts from his personal holding. This company was doing very well in 2008 and 2009. Both these years the company reported approximately Rs 250 crore of turnover and about Rs 45 crore of net profit. After that there were certain issues in the management and some top people left from the company. At the same time the company decided to go for some restructuring. They had six units have curtailed to four units. Lot of restructuring and regrouping was done and now the company is back on track. This year the company will report about Rs 4 kind of earnings. But next year I do expect a repeat of 2008-2009. Their employee cost has gone up by 50%. The employee cost was about Rs 8.5 crore in the first half of last year and has gone up to about Rs 12.5-13 crore in the first half of this year. In May this year, the company for the first time appointed a professional CEO Velumani. Velumani is an expert in the gear technology and has worked for 16 years in Flender and Winergy. Flender and Winergy is a part of Siemens Group. Siemens bought out Flender and Winergy for about 1 billion euro four-five years back. This company now is headed in a different zone altogether in the next two-three years. The company has got about 80 acres of land at Coimbatore which is worth Rs 80 crore and a cash of about Rs 45 crore. That adds up to Rs 125 crore whereas the current market cap is hardly Rs 315 crore. So, if one takes out this Rs 125 crore from Rs 315 crore we get Rs 190 crore of market cap. Next year’s profit will be about Rs 45 crore. One is getting this company for 4 PE multiple and that’s too cheap. The company is now getting into screw compressor business in a big way. Some top people from Atlas Copco could be joining this company. Disclosure: We own about approximately 7 lakh shares of Mahindra Ugine and10 lakh shares of Shanti Gears in our PMS product. On Fertiliser space A: I rarely go through all the things happening in this space because every second month we hear that there is a meeting on the fertiliser policy. I just go by demand-supply and currently while interacting with people I have realised that fertiliser demand is exceptionally high. There is a serious shortage of fertilisers and that is why I have been bullish on this space for the past three years. I am not concerned about the policy because hardly any investment has gone into fertiliser industry for past years because of non-remunerative prices and government policy. Government talks about brining down inflation to 7% I fail to understand how can you bring down food inflation by increasing interest rates? If they want to bring down food inflation increase the agricultural output. The best way to increase agricultural output is creating huge capacities for fertilisers. The government has to sooner or later bow down to the demand of this industry and that is going to lead to higher production of fertiliser. It will result in higher crop production and will ultimately lead to lower food inflation. The solution is not increasing interest rates but boosting crop output. No matter what happens in the short-term these all stocks are going to be multi-baggers in the long-term. One could see sell out happening in stocks likeCoromandel, Chambal and Mangalore Chemical.

Fastest Growing Small Companies 2011

SMALL & STARRY-EYED

Click here For The Full List of Fastest Growing Small Companies 2011 Every investor dreams to have a future Infosys or Titan Industries in her portfolio. But choosing the right gems out of over 5,000 listed companies is no mean task. Take heart, ET Intelligence Group has done the job for you. Here's a list of 100 Fastest Growing Small Companies that could be future giants. The phrase ?nothing succeeds like success? might be a cliché, but when it comes to demonstrating the success nothing quite succeeds like growth. It is the growth in revenues and profitability that validates the correctness of a business strategy or a robust business model. Better still, if this is achieved consistently over a period of time. Both large corporates and the smaller ones have their own set of growth stories. Still the limelight is never the same. Bigger companies are always the ones that are talked of more and corner the bigger share of attention. After all, their growth into biggies has already confirmed their success. However, as they say, ?the great thing in the world is not so much where we stand, as in what direction we are moving.' Going by this logic, we feel it is important to celebrate the growth stories even of smaller companies. They may be standing low on the ladder, if size were a criteria, but their consistent growth indicates that they are moving in the right direction. They hold the potential to become India Inc's poster boys in years to come. While the ubiquitous disclaimer about future's uncertainties is definitely in order here, we recommend investors cherry pick companies from our list based on their individual research. Such investments could prove immensely fruitful over next the few years. THE STREET SHOW Last one year has been bad for the stock market and in times like this small and mid-cap companies tend to suffer the most. However, that was not the case with our last year's list of 100 Fastest Growing Small Companies. Between last and this October BSE Small Cap lost 36%, BSE MidCap fell 27% and BSE Sensex slipped over 15%. However, three in every four companies from the 2010 list of Fastest Growing Small Companies have outperformed the BSE Midcap Index in this period, while 52 companies have performed better than the BSE Sensex itself. One in every three companies gave a positive return during this period. It is worth noting that this performance is calculated based on monthly average prices and not point-to-point comparison. THE STAR CAST OF 2011 The list of Fastest Growing Small Companies remains, as usual, a representation of varied sectors from auto ancillaries, pharma & FMCG, chemicals to packaging and mining. Only about half the contenders of last year could make it to the list this time. In a few cases this was on account of the company's inability to continue to perform well. However, quite a few had to lose their rankings due to the raised bar. The list this year is topped by Ester Industries, maker of polyester film, which made a dashing entry into the list, thanks to the runaway prices of its final product. Zydus Wellness, our last year's topper maintained its momentum to secure the second place. While National Peroxide and Mayur Uniquoters improved their last year's rankings to take third and fourth places, respectively. A brief analysis of our 10 toppers follows the main story for readers' easy reference. ACTION & DIRECTION One of the key challenges in compiling this list was to weed out unsound and potentially dubious candidates. This is important because one can't worship growth just for the sake of it. We tried to achieve this by putting strict parameters for companies vying to enter the list. Only companies qualifying on all these accounts were considered for ranking. As such, making it to the ranking is itself quite an achievement. The first thing considered was the debt-equity ratio ? the gauge of leverage. Any company with a reading of above 1.5 in last three years was dropped for being too leveraged. Similarly, interest coverage ratio, indicating the ability to service the debt, had to be above 5 for three consecutive years for the companies to make it to the list. The next criterion considered was the return on capital employed (RoCE). RoCE is a measure to figure out how efficiently a company utilises its capital invested in the business. Too low a return and the company could end up in a debt-trap. Hence, companies that could get RoCE of above 15% for the past three years were only considered. Additionally, companies unable to generate positive cashflows from operations for at least two of the past three years were removed. Finally, the revenue benchmark to qualify as a small company was raised to 1,200 crore or below for the current financial year to accommodate the overall growth and inflation against 1,000 crore or below in the previous year. At the lower end, companies with a market capitalisation below 100 crore were excluded. Top 10 Companies ESTER INDUSTRIES FY11 saw the demand for polyester film ? also known as BOPET film ? move up strongly on products such as mobile touch screens, LED televisions and solar panels. The prices soared as supply failed to keep pace, enabling companies to make a killing. However, as supplies grew, BOPET prices came down substantially. Ester Industries' June 2011 quarter net profit tumbled 81% y-o-y. This means the company is unlikely to maintain its feat next year. However, with its capacities more than doubling last year there will be a substantial volume growth. ZYDUS WELLNESS Zydus Wellness, the 350-crore FMCG arm of Zydus Cadila group, has a strong product portfolio with an underlying health plank. The company has invested heavily on building its brands such as Sugar Free, Nutralite and EverYuth. Despite a subdued performance in the June quarter, the company's business continues to hold the promise of strong growth. Sugar Free is India's largest-selling low-calorie sweetener with an 86% market share. EverYuth range of skin-care products enjoy their leadership position in the scrubs and peel-offs category despite competition from MNCs and other Indian players. However, the company is facing intense competition in the face-wash category. Growing at over 20%, the company is poised to achieve its target of 500-crore revenue by 2013-14 NATIONAL PEROXIDE Improvement in the prices of chemical hydrogen peroxide helped the industry leader National Peroxide in FY11. The company achieved 49% jump in revenues and 255% in net profits, while its production improved 11.4% to 71,826 tonne. The company expanded its hydrogen peroxide capacity by 24%, for which it had to shut down its plant in the April-June quarter for 70 days. Even after commissioning the plant, the commercial production could begin only from September 2011 onwards. This is set to affect its numbers in the first half of FY12. However, the second half of FY12 onwards it will enjoy the full benefits of expanded capacity. MAYUR UNIQUOTERS Mayur Uniquoters is India's leading manufacturer of artificial leather and supplies to domestic automakers such as Maruti, Tata Motors, Hero MotoCorp, M&M, etc, and footwear makers such as Bata, Liberty, Action, etc. It has continued to grow well over last few years without leveraging its balance sheet and is one of the few companies giving quarterly dividends. The company has started supplying to overseas automakers such as Ford and Chrysler and is trying to enlist with GM, Toyota, BMW and Mercedes Benz. The company has maintained its position in the 100 Fastest Growing Small Companies list for second consecutive year and has proven a multibagger in last one year. It appears well placed to continue its steady growth in coming years. SANDUR MANGANESE Sandur Manganese & Iron Ore is India's secondlargest manganese ore miner and also operates a ferro-alloys plant with almost all its 2,000-acre mining land in Karnataka. The company benefited from the improved pricing scenario in FY11 although its sales volumes dipped on export ban in Karnataka, high freight costs and 20% export duty imposed on iron ore. The company's June 2011 quarter numbers were hit by Supreme Court's blanket ban on mining activity in Karnataka. This factor is likely to weigh on its overall performance of FY12 like other mining companies and could make it difficult to maintain its position in the list next year. LUMAX AUTO TECHNOLOGIES Lumax Auto Technologies is an auto-component maker supplying transmission and steering components, body and chassis and electrical components. Growing production of automobiles by both Indian and foreign players, a buoyant replacement market and rising costs have benefited Lumax. It is a debt-free, cashrich company and is planning to add two more plants to the existing six facilities in Maharashtra. Its entry into infrastructure lighting, although small at present, could safeguard it from cyclicality of the auto industry in the future. WABCO INDIA WABCO India, now a 75% subsidiary of WABCO Holdings of the US, is a supplier of auto components to commercial vehicles industry. A significant revival in Indian commercial vehicles industry, thanks to investments in development of road and infrastructure, enabled it to post a strong revenue growth. As investments in roads grow with more and more private participation, the long-term growth trajectory will remain strong for the commercial vehicle segment. However, in the shortterm, cyclicality in the commercial vehicle market and rising raw material costs could be a concern. ECLERX SERVICES Mumbai-based KPO operator eClerx has benefited from the buoyancy in the demand from the global financial market. Despite talks of a global slowdown, eClerx reported a strong sequential growth of over 6% in the five out of the six quarters ended September 2011, validating success of its business model. PBDIT margin above 33% shows that the new business did not come at the expense of profitability. This has helped in offsetting the impact of higher taxes due to minimum alternate tax on SEZ income. The company offers critical back-end services to the financial sector, which are not affected by the movement of business cycles. This should keep the company going during tough times. HAWKINS COOKER Hawkins Cookers is seeing a huge demand for its products but was unable to meet it because of labour issues at its plants. Last year, the company's net sales grew 17%. The profit declined due to higher raw material prices. But now most of the labour issues have been resolved and input prices have come down from their peak. Hence the company will be able to run its plants more efficiently and higher growth can be expected. Besides, the company is financially sound with high return ratios, strong cash flows and low debt. EVERONN EDUCATION Education services provider Everonn Education has reported strong buoyancy over the past three years backed by sound return and liquidity ratios. Its stock has, however, plummeted 44% from the year-ago level following the judicial action against its erstwhile MD in early September. The company has appointed new leadership and has ensured the soundness of its business fundamentals. In the past one month, its stock has recovered from the lows of 228 to the current level of 380. Its performance under the new leadership in the next few quarters will be crucial to restore the investor confidence. Click here For The Full List of Fastest Growing Small Companies 2011

Ramkrishna Kashelkar With inputs from Jwalit Vyas, Ranjit Shinde and Kiran Kabtta Somvanshi