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Add these smallcaps to your portfolio now

October 05, 2006 09:20 IST

Investment analyst, Ashish Chugh, gives his picks in the smallcap space. According to him Venky's India is a contrarian pick in the poultry industry. He believes that Venkys has the potential to become the McDowell of the poultry industry. He advises investors to accumulate this stock. 

Talking about Flat Products, he believes that the company will report good earnings in the coming quarters, and this will lead to interest of many more players into this stock. 

Nectar Lifesciences, in his opinion, looks grossly undervalued compared to its IPO price and the GDR price. As a result of its expansion plans, this company is expected to log much higher revenues and profits, he says.  

Excerpts from CNBC-TV18's exclusive interview with Ashish Chugh:

Why do you like Venky's? Why would you buy it at Rs 137?

Venky's India is a contrarian pick in the poultry industry. This company faced a very tough time in the last one year, this was primarily because of the bird flu that spread in the January-March quarter. As a result of that the operations of the company was severely affected.

The company reported a loss of about Rs 4 crore (Rs 40 million) in the January-March quarter. Inspite of that loss, the company has managed to make a profit of about Rs 11 crore (Rs 110 million) for the full year.

Now the fears of bird flu have started receding and the company seems to be getting back on track. This company is the largest player in the poultry industry and it is an integrated player in the sector.

This company is strong in the institutional segment and supplies its products to all major hotels and Indian and multinational food chains like McDonald, Pizza Hut and KFC.

When one talks of the poultry industry, Venky's is the only large player. There may be other players, but they are all small players. Venkys is probably the only national player in the sector. When one talks of the poultry industry, one  cannot even recall a number two.

So Venky's is a company where, given its size and scale of operations, it has the potential to attract institutional investors. Ofcourse they will get in after the marketcap has gone a couple of times from these levels, and after there is more visibility in terms of the company's earnings.

This company otherwise has been a consistent dividend payer and it has been paying regular dividends to its shareholders for many years now. Even when the company was faced with the worst of its times, it paid dividend to  shareholders.

Investors can use this sentiment in the company and accumulate this stock. It may turn out to be the McDowell of the poultry industry.

In terms of earnings, what are you expecting from that company because the last quarter was not very strong like you said?

This company reported a loss in the January-March quarter and in the April-June quarter also, the profits were lower than the corresponding quarter last year.

But I think given the fact that the fears of bird flu are now receding and the company has undertaken expansion in the last one year, going forward, one can see the sales revenues and the profits of the company going up substantially from these levels.

I think the worst is already built into the price and you don't have much to lose from these levels. A good quarter is going to catapult this stock to a different orbit.

Flat Products is the other stock that you want to talk about, tell us a little bit about their business?

Flat Products is basically an engineering company. This company is involved in setting up turnkey projects of cold-rolling mills, galvanising mills and metal processing lines.

This company was doing extremely well till financial year 2003-04. It made a net profit of Rs 10 crore (Rs 100 million) for that financial year. However, in the year 2004-05, the company saw a sharp downturn. This downturn was mainly because of the fact that the company was taking all fixed price contracts from its vendors.

Also, because of the increase in steel prices, the cost of the company went up substantially. Since all the commitments were at a fixed price, the raw material cost of the company went up substantially. The projects, which were looking highly profitable initially, turned out to be a loss because of which the company's profits came down from Rs 10 crore to about Rs 1.5 crore (Rs 15 million) for FY04-05.

Now, the company seems to be learning from its mistakes. Now, the company has started including escalation clause in all the new contracts, that it has been signing. This company has got a small equity of just about Rs 5 crore (Rs 50 million). This company had a sales revenue of around Rs 300 crore (Rs 3 billion) last year and made a profit of around Rs 2.2 crore (Rs 22 million).

Now since steel prices have been stabilising, and the fact that the company is introducing an escalation clause in all the contracts, the company seems to be getting back on track. This is evident from its first quarter results, where it has done 100% increase in its sales revenues.

As against a loss of Rs 2 crore (Rs 20 million), the company has made a profit of Rs 75 lakh (Rs 7.5 million). One must realise that the April-June quarter is the worst quarter for this company. It is the leanest quarter and having done a 100% increase in sales revenues, and coming back to the profit list from a loss of Rs 2 crore, the company should do well in the coming quarters also.

The company has got a good order book position in hand. The order book is roughly between Rs 400-450 crore (Rs 4-4.5 billion), which has to be executed over a two-year period.

The company derives roughly 70 per cent of its revenues from export sales. So for an engineering company, a market cap of Rs 50 crore (Rs 500 million), which does a revenue of Rs 300 crore looks grossly under-priced. Again in this case too, the worst looks discounted in its stock price.

In the coming quarters, when the company reports good earnings, it will lead to interest of many more players into this stock.

Do you believe that Nectar Lifesciences is an undervalued stock as well?

Nectar Lifesciences came out with its IPO last year. It was priced at Rs 240. The stock is available at roughly 55 per cent of that price at Rs 130-135. Again, this company had come out with a GDR too, about a year back, where it issued optionally convertible debentures with the conversion price of close to Rs 330. So the stock looks grossly undervalued compared to its IPO price and the GDR price.

Given the fact that the company has been reporting strong earnings and good visibility of good earnings in future to take place, this company made EPS of close to Rs 28 for the financial year 2005-06. In the first quarter too, it has shown significant improvement in its topline and bottomline.

This company is undertaking various expansion projects in Baddi in Himachal Pradesh and at Derabassi, where its existing plant is located. So after those projects go on stream, this company is expected to log on much higher revenues and profits.

The company's subsidiary, which is located in Sri Lanka does a decent turnover and makes a profit of close to Rs 35 crore. So given all these factors, this stock trades as a substantial discount to its IPO price, and at Rs 130 with a P/E of 5x and with good visibility of future earnings, this stock looks underpriced.

Any disclosures to make about these three stocks?

My clients and I would be having positions in all the three companies.

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