Ajit Motwani of Sharekhan picks some smallcap stocks with potential. Motwani likes Ratnamani Metals, WS Industries and Transport Corporation of India.
Excerpts ftom CNBC-TV18's exclusive interview with Ajit Motwani:
1. Ratnamani Metals:
Ratnamani Metal is a manufacturer of tubes and pipes of stainless steel and carbon steel. These pipes are used in industrial applications, in crude handling industries like refineries and power. Looking at the capex that the refinery industry has lined up, around Rs 85,000 crore in the next 3-4 years, the investment scenario looks positive.
The company too is proactively expanding their capacity, almost doubling capacity of both of its segments, stainless steel and carbon steel. It has capex of around Rs 65 crore.
The first phase of the capex is already implemented and the next phase is expected to get over by this year end. This is expected to grow the revenues as well as the earnings.
Based on FY07 earnings, we expect the company to report an EPS of around Rs 46 in FY07 and around Rs 56 in FY08. Based on current valuations at current prices, the stock is trading at around 7.5 times FY07 and 5.5 times FY08.
We would value the company as a capex ancillary, and a fair comparison would be a company like Adore, which is also a capex ancillary and which is trading somewhere around 9-10 times FY08 earnings.
We have valued the company on the same basis and we have put in a price target of around Rs 520. So it's a substantial upside and even the order book at around Rs 350 crore is almost at an all time high and it's almost around 1.2 times FY06 sales.
2. WS Industries
WS Industries manufactures porcelain insulators, which are used in power, transmission and distribution sector. The company has a very big plant at Chennai. They are about to set up a new plant for which they are looking at some locations in Gujarat and Andhra Pradesh. It will be a new plant, which will entirely manufacture the holocor insulator, which is a huge 20% margin business.
We have valued this company at around 8 times FY08 earnings, we expect an earnings of around Rs 7.5. So the business will be valued at around Rs 60, the company has lot of upside to offer from the potential realty venture.
They are developing around 15 lakh square feet of IT park near their current facility at Chennai, for which they have tied up with TCG. This 15 lakh square feet area will come up in four phases in the next four years. The first phase is expected to start around June 2007, the first phase will be around 2.5 lakh square feet.
Therefore, the land value itself is around Rs 100 per share and even if you discount it by 50%, the realty value per share works out to around Rs 50.
3. Transport Corporation of India
Transport Corporation of India or TCI has got an ideal strategy for its two businesses. The first business is Supply Chain Solution where it offers supply chain solutions to clients like Mahindra & Mahindra, Bajaj Auto, Cadbury's, Amul India.
This is an extremely higher margins business of around 10-12% on EBITDA basis as compared to 2-2.5% for the pure transport business. So basically the growth in this business will be exponential, of around 40-45% for the next 3-4 year.
The second business they are concentrating on is the courier division wherein they offer specialised services for the courier industry. So overall they have got a capex of around Rs 400 crore over next 4 years.
The company is also merging their group companies TCI Sea Ways, which is into coastal shipping. So on a historical basis, the merger is earnings accretive; for example on a standalone basis TCI has reported around Rs 14 EPS for FY06.
On a consolidated basis, after the merger of TCI Sea Ways the EPS works out to Rs 18. On an historical basis also, the merger is earning accretive by around 30%. They also have a dedicated capex for TCI. So going forward, they have got good amount of capex for both the transport as well as the shipping division.
We expect around Rs 25-26 EPS in 08 for the consolidated entity. But this company charged depreciation on an accelerated basis, so cash EPS is substantially high.
On cash EPS basis, the company would be trading at around 7.5 times FY07 and around 6 times FY08. While comparing it with other companies like Blue Dart and Gati, it was trading at around 10 times cash FY08, we guess the stock is substantially undervalued.
Disclosure: We don't hold any of the stocks discussed.
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