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2 stocks you could buy

August 25, 2006 14:22 IST

Investment analyst, Ashish Chugh recommends Deccan Gold Mines to the long-term investor, who has an appetite for high risk.

He also likes Shalimar Paints because he sees the 100-year-old company sitting on assets, which are valued at historical cost. The replacement value of these assets can benefit the company going forward, he predicts.

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

Why do you like Deccan Gold as a prospect?

Deccan Gold Mines is a speculative pick in the gold mining sector. It has got no revenues as of now. With a marketcap of Rs 80 crore, it may look to be highly expensive. But if you see the potential of the sector, it maybe an interesting story going forward.

This company has been promoted by Australian investors through a Mauritius subsidiary, where the promoters hold about 70 per cent stake.

If you see the gold mining business now, it is like the oil exploration business, where there is a high degree of uncertainty involved. Nobody knows whether the amount that is being spent for the exploration process will really yield any results or will have to be written off. So from that perspective, this is a stock for the long-term, high-risk investor.

The advantage Deccan Gold has is that it is the first listed company and the first private sector company in the gold mining sector. It is sitting on some of the most prospective blocks in the country.

This company has got close to about 10,000 square kilometer of blocks in different states like Karnataka, Andhra Pradesh, Rajasthan and Kerala. The company has also done a lot of exploration for the past four years. It has received encouraging results from its blocks in Karnataka, particularly the Hutti block and the Shimoga belt block.

Gold mining is a business, which still is in its infancy in India. India produces just 3 tonne of gold per annum as compared to 300 tonne, produced by Australia. So there is a huge unexplored potential in the sector. And with Deccan Gold being one of the first players, sitting on the most probable blocks, has got a first mover advantage.

This recommendation is made on a basic premise that the company will strike gold. As of now, with zero revenues and Rs 80 crore marketcap, the company may look to be highly expensive. But in case they strike gold, this Rs 80 crore of marketcap will look too small. It is a stock for the long-term investor with an appetite for high risk.

By when do you think we could see something by way of numbers to justify that marketcap and are the promoters okay because one doesn't know the track record of this promoter at all?

As far as promoters are concerned, when the stock price is low, there is definitely some concern in the minds of the investors about the promoters. But they have been in this business in Australia.

From my own sources and from the market sources, I have not gathered anything negative about them. These are promoters about whom nothing much has been talked or written about. So very less information is available in the public domain. But checking up their past track record, one does not find anything wrong with the promoters.

Any disclosures to make about Deccan Gold?

It would be safe to assume that my clients and I would have a position in the stock.

Shalimar Paints is your other recommendation. How does it compare to the rest of the listed stocks and why do you like this one?

If you see the paints sector, there are five major players there. The largest, of course, is Asian Paints , which does a turnover of close to Rs 2500 crore and commands a marketcap of Rs 6200 crore. Then comes Nerolac Paints, Berger Paints, ICI and Shalimar Paints.

If you see the valuation of these companies, there is a huge valuation gap between the fourth and the fifth largest player, even though there may not be such huge differences in the size of their business. Berger does a turnover of Rs 1000 crore and has a marketcap of Rs 1500 crore, while ICI does a turnover of close to Rs 950 crore and has got a marketcap of Rs 1250 crore.

Shalimar does a turnover of close to Rs 220 crore and has a marketcap of just Rs 60 crore. There is a huge valuation gap between the fourth and the fifth largest player in the sector, which I believe should narrow down.

Shalimar Paints has got three manufacturing plants, which are located in Howrah, Buland Shaher and Nashik. They are putting up another greenfield facility in Tamil Nadu, which is expected to go on stream in the next six months.

Not many people are aware of the fact that this is a company, which belongs to the Delhi-based Jindal group. This is a 100-year-old company, which was acquired by the Jindals along with an NRI investor in 1989. Since the company is 100 years old, it is sitting on assets, which are valued at historical cost.

The replacement value of the assets would be many times more than the marketcap of the stock, which is at the number one position. Secondly, the huge differential in the marketcap, which is there between the fourth and the fifth largest player will narrow down.

The main concern in this stock is that this company has got low profit margins compared to the industry. If compared, ICI does a profit margin of close to 11 per cent, whereas Shalimar is just half of that. The main reason for the low profit margin is the scale of operations, but the fact is that there has been an increased realization in the company and it is doing everything to increase the profit margins, of course, without sacrificing the market share.

As the profit margins increase, the valuation gap is going to narrow down. At the current price of Rs 150, one does not have much to lose in this stock, but if one hopes that the profit margins will improve in the near future, which the management is confident of, then one can see a much higher marketcap for this stock.

Any disclosures?

My clients and I would have a position in this stock.

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