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Stocks: Some hidden gems

November 06, 2006 16:18 IST

Investment analyst Ashish Chugh discusses his views on Apollo Sindhoori Capital and JBM Auto. He likes Apollo Sindhoori Capital as it has shown consistent increase in its revenues and profitability over the past few years, and has proved to be a consistent dividend payer.

He says that at the current price of Rs 115-120, the risk-reward ratio is extremely favorable.

Looking ahead, he sees a lot of potential in JBM Auto, and at a price to earnings ratio of Rs 10, he feels that the stock looks undervalued.

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

Apollo Sindhoori Capital -- Why do you like that stock?

Apollo Sindhoori Capital is a part of the Apollo Hospital Group. This company is a member of BSE and NSE. This company is also a depositary participant with the NSDL (National Securities Depository Ltd). Apollo Sindhoori also has a subsidiary, which is a member of NCDEX, a commodities exchange.

This company has got a good branch network. It has got a network of 120 branches of its own, and this is coupled with the franchises it has, totaling about more than 450 offices throughout the country.

This company has shown consistent increase in its revenues and profitability over the past few years. For the financial year 2005-06, this company had a total revenue of close to Rs 57 crore and made a profit of around Rs 8.4 crore.

It has got a small equity base of about Rs 5.4 crore, which translates into an EPS of around Rs 17. The company has also been a consistent dividend payer. This company paid a dividend of 60% to the shareholders last year.

In the stock broking industry, we are witnessing a lot of interest from the foreign investors who want to take a stake in the Indian stock broking companies, of late. Recently BNP Paribas has taken a stake in Geojit Financial. Bank of Muscat has recently taken a stake in a lesser-known company called Mangal Keshav Securities, which is a Mumbai-based brokerage.

There are other companies like Indiabulls, Motilal Oswal and Sharekhan where strategic investors have taken a stake; most of these companies have been richly valued.

Apollo Hospital is trading at price to earnings ratio of just about 7, and it paid a dividend of 60% last year. This looks undervalued compared to many of the valuations, which many of the other stock broking companies have got from the foreign investors.

Apollo Hospital already has a strong relationship with many institutional investors, FIIs and private equity firms. The possibility of Apollo group giving a stake to a foreign investor in this company cannot be totally ruled out. Incase that happens it will certainly be not at the valuations at which it is trading right now.

So you have a company which is a consistent dividend payer and is trading at a reasonable price to earnings ratio. The growth in the business is expected to

be good. Even on a conservative basis, it would be between 25-30%. The price to earnings ratio is expected to come down further.

At the current price of Rs 115-Rs 120, the reward to risk ratio is extremely favorable.

JBM Auto is the other stock that you like. Tell us about its financial performance?

JBM Auto is a Delhi based company. This company has got its manufacturing plant located at Faridabad and Greater Noida.

This company caters to the automobile and white goods sector. It manufactures sheet metal components, assemblies from those components and also tools and dyes. The financial performance of this company for the last few years has been very good. It has been consistently increasing its sales revenues and profits YoY and also QoQ.

For FY05-06 this company registered a total sales revenues of close to Rs 110 crore, which is a 25% increase over FY04-05. The profits grew by 25% from 5.3 crore to 6.7 crore. The EPS of this company is close to Rs 10. In the first half of this financial year, the company has done a 25% increase in sales compared to the same period last year, and about a 10% increase in net profits.

The company is expanding its capacity and getting into forward integration in three areas. Firstly, the company is increasing capacity in its existing plant by adding higher tonnage presses, which enables it to make bigger sheet metal components and cater to a wider segment of customers.

Secondly, the company has gone into forward integration by manufacturing special purpose vehicles. These are basically used in the construction industry; these are tippers, which are put behind the automobile and they are used for carrying construction material.

They have started manufacturing these kinds of specialised transportation vehicles at their plant in Faridabad.

Thirdly, this company has been selected, by the joint-venture company of Mahindra and Mahindra and Renault of France for their passenger car project at Nasik.

The company is putting up a dedicated facility at Nasik for catering to that project. This facility has been put up at a cost of Rs 30 crore and is expected to go on stream by the end of this financial year.

So if one sees this company as a whole, this is a stock, which at Rs 100, is trading at a price to earnings multiple of just around Rs 10.

The company is expanding its existing capacity. It has entered into special purpose vehicles, and when the Nasik project goes on stream that will add substantially to the topline and bottomline of the company. So given all those factors, at a price to earnings ratio of Rs 10, the stock looks undervalued.

Do you own any of these two stocks?

It will be safe to assume that my clients or I will have a position in both the stocks recommended.

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