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.