Top Mispriced Bets for next 6-9 months. 50% upsides?

Stock Opportunities
21

I strongly believe that any investment we make has to be for the long term and if the story doesn’t appeal for long term its not worth betting our hard earned money on it…This is because my experience tells me that once we enter such mispriced bets with a short term appreciation in mind and if the factors we bet on doesn’t turn out as expected then our capital remains stagnant, if not depreciate, for quite a long period of time… Capital preservation has to be the first goal followed by its appreciation…

Now, on the second point that discovered stocks don’t offer much scope for appreciation, its not true in entirety because a good long term story passes through many phases with discovery being only the start of first phase and story will appreciate continuously for many years in a phased manner untill it gives way to me-first craze…There are many examples of it like Titan, Page (have passed through this phase) and even our PI Industries (which is in a discovery phase)…

In current markets many mispriced bets which even have long-term story and visibility to it are available… The first one is Pi Industries, which now is not a mispriced bet but has a strong visibility of growth and can therefore offer decent safe appreciation with strong capital preservation certainity…

Second one which might slightly suit this discussion as far as mispricing and undervaluation goes but is still having long term growth story attached to it is Jubilant Industries… Well established brands under its kitty like Jivanjor (Pidilite’s only formidable peer), Ramban (4th Largest in India) and a world leadership position in Food Polymer segment, being 3rd largest supplier in the world of SPVA, Jubilant Industries is a grossly undervalued story…

I will not discuss much here as already in Not-so-Hidden-Gems section I have discussed many things regarding this company as also in my research note I have given a SOTP valuation based on which current core businesses, even at a significant discount to its peers, deserves a valuation of 259.3 cr. vis-a-vis current mcap of 145 cr. which offers a decent safety to our capital as also offers a great scope of capital appreciation…

The reason for such undervaluation, as derived by me based on the discussion with many knowledgable analysts whom I interact with are :

(1) Listing history of just 7-8 months with many funds holding it because of its demerger from parent company compelled to exit it because of their funds criteria for mid-cap stocks…

(2) Limited past financial track-record as the company will have first full independent operational fiscal as FY12…

(3) Lack of knowledge amongst financial fraternity members regarding each operational segment of the company like Consumer Products, Food Polymer, Latex and SSP…

(4) Uncertainity regarding Retail division merger asto how much accumulated losses will be transferred, how much debt will be transferred, future course of action, etc.

Now, this is what I call the real opportunity of mispriced bet… as because of totally non-operational issues, a company from a strong group is grossly undervalued on the bourses… Its only misperceptions which are letting it remain undervalued and once such misperceptions get cleared or addresed, it will appreciate and achive its deserved valuation in no time…

Now, the question arises as to what is the certainity that the misperceptions that financial fraternity members have will get cleared sooner rather than later and our capital will not remain stagnant for a long while… The certainity lies in the fact that if the company doesn’t get deserved valuation then its the promoters themselves which will loose more than the minority shareholders…will refrain from discussing further here.

To sum up, as per me Jubilant Industries is a perfect undiscovered mispriced bet but with a long term investment view in mind which offers a great amount of safety to our capital preservation motto with a high certainity of significant appreciation of our capital…

Rgds.

1 Like
22

Hi Donald,

Have heard that Manjushree is taking away market share of other established player. Got some info from analyst tracking Manjushree and its competitor.

Thanks,

Guru

23

Can any body throw some light on valuation from for navneet publication.I am find it technically very strong.I would be very thankful if somebody have any idea on this stock.

24

Comments in Bold in-line.

One needs to follow the Capital Allocation philosophy Link: …/valuepickr-scorecard-aug-2011/399834292 to understand the spirit behind the Short Term Portfolio forum.

It is designed for CHURN. It is designed to enable you to always have resources to participate in a NEW BETTER opportunity. It is designed to keep you ENERGISED for turning as many stones as possible (in the Peter Lynch way), in order to find a few gems!

In our kind of under-researched, underexposed small and mid-caps universe stocks, conviction has always developed over time, developing a hypothesis and seeing that played out quarter by quarter, and year by year. DAY ONE, no one could have high CONVICTION in ANY these stocks. Yes once you develop high conviction, go all for it, I firmly believe in that. I am a firm believer of concentration in the Long Term Portfolio.

Having said that, it is not that we are lowering our standards for the Short Term Portfolio. We adhere to the same principles of Strong Balance Sheet, Good margins & returns, strong growth performance & visibility, possible dominance of a niche, with good management. Turnaround cases that show a good glimpse into above are welcomed in too! All this, BUT with an accent on BIG UNDERVALUATION!

So that the odds of success are stacked heavily in favour! Especially in uncertain markets like these.

To me, each of the Short Term portfolio contenders must have the potential to migrate to a Long Term Portfolio, if they are able to execute well, and go on to the next level.

I do not disagree with you here. There are quite a few examples where the business performance will keep running ahead of expectations (that are priced in). The trick is to be able to spot what makes this XYZ company different from the regular pack. I need much more experience and refined investment sense, to be able to take such calls.

PI may well be such an example. But it ran away too quickly too fast from being mispriced:) I am also invested significantly in it but at higher levels of 450 (which I considered reasonable valuations). I have to do much more homework on the company before I have very high conviction in PI. I intend to prepare a lot of secondary market data on the company and go and meet management to up the conviction curve. Digressing here, but have you gone and interacted with Management face to face, Mahesh?

In the context of the Short Term Portfolio, need to check if a BIG UNDERVALUATION exists!

25

Hi Guru

Thanks for the info. If true that is welcome!

Manjushree, we must remember is a south based player. They have always dominated South market because of the logistics involved. There are North based players who are dominant there. Please ask your source and revert - which competition he was referring to, based in South or North or West in Mumbai?

Manjushree is happy to keep investing in the South market itself, as the demand is much more than supply - especially in the summer months Q1 & Q4.

-Donald

26

Yes we need to be really greedy and choosy! The accent must be on absolute UNDERVALUATION! There are many contenders to shift through.

Additional factor to consider - A good dividend track and currently high dividend yield is Plus+, given the state of the market.

-Donald

27

At current valuations Globus Spirits may be good if it has got its act together!

Hitesh any updates? What about the growth visibility? any projections to share?

-donald

28

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Hi Donald,

My Replies :

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Got it Donald and its prudent… However, I would like to add here that one needs to be very strict and disciplined in his approach towards capital allocation if he goes like the way you have mentioned in CA thread…Otherwise, the indicative time-frame, 6-9 months and an attractive indicative return of 50-60 % could be a distractor against the original long-term investment strategy…

PI **

mispriced:))

** Mahesh?

Not face-to-face Donald but have definitely interacted with management as without that its impossible to understand the strategy and positioning of company in its operational segment… Also, what exactly you mean by secondary market data ? Kindly elaborate… Will be great if you initiate management meetas itwill help a lot in building more conviction…

In **

exists!

Sure Donald… Do check and get back to me…I quoted Jubilant Industries here because in the start of this thread you mentioned

““The businesses may be on the verge of a turnaround, or about to reach significant scale and make its presence felt in its niche, so (historical) numbers do not accurately reflect the changing dynamics of the business, and the larger market continues to ignore these - oftendue to legacy issues/perceptions (company/sector) or just underexposure!””

which immediately brought to my mind this company because over last month or sobased onmy interaction with financial fraternity members, I have come to a similar conclusion…

Rgds.

Comments in Bold in-line.

…

**

29

Globus Spirits is an out of favour stock currently. There does not seem to be too much wrong with the fundamentals. In fact the much awaited merger with the promoter group company also has materialised. So capacities are being added to the already expanded capacities.

In the current scenario of the markets, most of the mergers, expansions etc are being viewed with scepticism. Same applies here with Globus. I think currently it is also a mispriced bet and deserves some attention.

Maybe Naga could add some more details.

**
**

Another stock which though not very cheap but looks mispriced is International Travel House Ltd. ITC parentage, low capex business model, debt free balance sheet, and valuations of around 9 times PE for a tour and travel company looks attractive. More has been already discussed on the relevant thread.

30

a.k. capital seems to be in good shape to perform well if anypositivesurprise comes thisquarter. bond market is poised to grow exponentially.

31

Thanks everyone. I may not have any access after tonight to the network till Sunday evening as I am in a remote area.

Please keep the discussions going.

I like National Peroxide and Globus Spirits among the current ideas thrown up till now. National Peroxide Q2 may be flat, so we have some time still to do more homework on it. Globus may require us to work in the new capacities and project Q3/Q4 sales, earnings better to take a valuation call. Otherwise there has been enough discussion on that stock in our forums.

Nagabrahma - your thoughts/workings on Globus will be great to have.

Keep more ideas coming!

32

Like mentioned by Omprakash, i also find wimplast and kaveri seeds interesting. Have been missing out on these ideas for quite sometime…may be we should dig deeper here.

Some ideas from my side:

GIPCL

IFB Agro

AMD Ind

Chemfab Alkali

MBL Infra

Regards,

Ayush

1 Like
33

IFB Agro has posted excellent numbers in recent quarters withboth its segments- IMFL and marine exports registering good growth. Could be a sound stock to invest in for the long term as well.

34

Hi Donald,

I am very bullish on National Peroxide for various reasons. But coming from the valuation perspective I see a huge margin of safety already built into the price. As of today, company’s market cap is around 265 crores. And the land on which company’s facility is based out in Kalyan is valued only at 5 lakhs as per the book value - this is a ridiculous and historical valuation. This land would be easily around 200 crores to 250 crores as in current terms and market.

And if this alone wasn’t enough, add to that the expansion company has undertaken and plans to move on with for the next few years. This should see the company growing at least 20% to 25% year on year for the next 4 to 5 years. The company has also been a consistent dividend payer for the the last 10 odd years with the dividend increasing almost every year to two. High promoter holding is another comforting factor at over 65%. Last but not the least, the company is promoted by Wadia group, which also lends it some creditability.

Considering the above factors, I see the company as a great short term as well as long term play. Can easily double in a year, provided Mr. Market does not play the spoil sport.

Regards.

35

Hi Manish,

Agree that NatPerox can be a short term play; but dont think it is a great long term play. Sooner or later international/local supply will come up to reduce prices. There is no real entry barrier and there are several much larger international players.

Reg wadia group: They are a known group but belongs to the same category like ruias, hindujas etc. Dont think that gives them a very high ranking! Also remember that wadias have much larger companies and hence management attention may be limited.

Land valuation: As long as the land is used for the industrial purposes, there is no point in revaluation at current levels. If they decide to shift the plant and then re-develop land one could use that metric. But given that the current expansion is on the same land it is unlikely that they have any plans to do that in the next 5-10 years.

I still like the stock but cannot believe that the H2O2 prices will remain at this elevated levels (giving them RoE>50%) in the long term. Competition will and should catch up

36

Let’s get some focus back to which are the best short-term portfolio bets - for next 6-9 months.

Here are my top 5 choices: (for fresh money and/on corrections). Investing for next 6-9 months to a year here, nothing much can go wrong - more of my idle cash should go here.

1). Atul Auto )- after a stellar FY12, company seems confident of maintaining a 40% growth for FY13. What I like is the ongoing de-bottlenecking exercise. Somehow what seems too good to be true, the company is saying they will double the production (24000 to 48000) almost entirely from de-bottlenecking exercise.

Ayush - Can you quiz the Management on this aspect? It’s time for stock-schecking again. How many dealers in the network now. Plans for 2012? a smart/quick poll will do

2. Oriental Carbon )- no matter how exciting they seem I am yet to make serious money from any chemical company:(. Somehow RM cycles keep playing truant in this companies and they can never be consistently on top of the situation for 2-3 years - what is needed for steady compounding. (case in point Vinati, Balaji Amines,etc.).

Oriental Carbon can be an exception:). Insoluble Sulpher (only a few suppliers) prices have remained steady for the last 6 months and more that we are tracking. Sulpher - the main RM fluctuates a bit - but has again corrected, so better margins expected going forward. There is enough visibility of growth (with new and upcoming expansions) and the price-point availability is real tempting (~4x) looking 1 year forward!

This deserves more attention from more folks!

3). Indag Rubber )- Company seems set to do a20-25% CAGR in Sales/Profits. So it stays put in my short-term portfolio (fresh money on good correction). Case is well argued, in Indag’s thread. This is a very decent company, and for many friends, finds a place in their Long Term portfolio. But for me it is not in the exalted company list like a Mayur, Ajanta, Balkrishna, GRRP, etc.

4). Technofab Engineering )- This is another very promising candidate in the infrastructure space - and doing very well. High margins and returns, solid growth, low-debt. at ~4.6x TTM PE, this is priced unbelievably…for the kind of profile it has, and the growth track it is on!

Atul Sethia - the stock story originator -prompted me to do more diligence on this company -but I got stock in some personal errands last few weeks. Again, this requires much more attention from all of us!! I will be at it next week for sure.

5). Mazda )- This seems like a no-brainer again- if the growth shown in Q3 persists! Sometime companies like these with excellent margins and returns remain value-traps - if they show marginal growth. Q4 results should give us the pointer.

Meanwhile, anyone wants to check with Management - whats up?

37

Hi Donald,

I’m also quiteoptimisticon the above 5 ideas…Atul Auto does promise to continue as a growth story at very reasonable valuations. Yes, I will try to take an update.

On Oriental, I feel its deep value n I keep accumulating it. I fail to understand as to why the stock is trading at these levels…looking at the data of RM and end product prices, I think they will continue to do close to 25%+ operating margins and it would be tough to find such cos at 3-4 PE.

On Indag perhaps a management interview update will be very useful.

Technofab & Mazda look cheap on valuations with growth ahead…we should try to do mgmt interview for these.

Ayush

38

Thanks Ayush,

Lets work further on Technofab and Mazda in preparation for Management Q&As.

-Donald

39

How about Sundaram Brake Lining as short term pick (15 months)

This is more of a special situation/ turn around play.

In 2009 crisis,Sundaram brake lining suffered forex losses about 100crs. They had a court case with Kotak Mahindra bank over this and reached a out of court settlement where sundaram brake had to pay 10cr. They have been paying around 1.5 cr per qtrs. This will go on for 5 more quarters.This has resulted in reduced EPS for the company by about 50%.

Once the payment is done(last is March 2013qtr),FY14 onwards their eps jump by 100% and stock price may be go the old levels of 350+ with good dividend payout (13-14rs).

More on this:

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Sundaram_Brake_Linings_Ltd_090212_Rst.pdf

(see EPS with /without extra-ordinary items and at the end Notes please read point 3)

Does’nt it look straightfoward doubler from these level??. Sundaram is supposed to be a investor friendly group with good corporate governance.

Hitesh, Donald, Ayush and other seniors please comment.

40

Hi Anant,

Will like to know more about growth prospects. In past 5 years there hasn’t been much growth.

Ayush