Investment advisor Mudar Patherya recommends Himatsingka Seide and Sirpur Paper Mills. He sees a turnaround story for Himatsingka Seide in 2008-09 and they will have a new plant onstream from FY09, he told CNBC-TV18.
While for Sirpur Mills, the expansion and modernisation is almost complete and it is an environmentally clean product which will attract exports.
Excerpts from CNBC-TV18's exclusive interview with Mudar Patherya:
Q: You continue to shop in this market, what are your stock ideas today?
A: The two stocks that I’m really looking at are Himatsingka Seide and Sirpur Paper. For all those people who have logged into the textile and paper industries, these picks might surprise because people may ask you why would anybody look at something from the textile industry and the paper sector today. I think partly because both companies have tended to rewrite the destinies and Himatsingka is very interesting.
Himatsingka is actually and technically not truly a textile company anymore, it's essentially a textile-cum-distribution company. All the people within their industry who have tended to put money largely in the fixed assets, largely into the manufacturing side of the business, Himatsingka comes as a very strong breath of fresh air. That’s largely because over the last one year, that is the calendar year 2007, the company is investing significantly and they have made three acquisitions on the distribution side, which means most of the investments are now being made not on the manufacturing side, but on how to reach customers better, derive better realization and better value valuation. And to that extent I would say that maybe in the next fiscal year, Himatsingka could well emerge with Rs 1,100 crore of revenues from the distribution side of the business and only Rs 200 crore from the hard core manufacturing side of the business, this is a very clear change in the organization’s DNA.
Q: The other one that you like is Sirpur Paper, what is the call on this stock and particularly the paper stocks, which have been seeing some interest off late?
A: Primarily paper companies over the last 2-3 years have not been attracting attention because of the large capex going into them for benchmarking, paper manufacturing cleanliness and environment standards in line with the new global benchmarks. Because of the large investments being made, investors are tending to stay away saying that we are not going to get optimal returns over a limited period of time, but I think we are finally seeing the end of the capexes, we are finally beginning to see evidence of improved returns becoming a reality after the significant capexes and I think Sirpur is interesting.
We have been looking at companies with marketcaps of close to about Rs 120-130 crore, one can buy a 1,30,000 TPA company for a marketcap of just around Rs 120 crore, that is amazing. When one sees the investments translated into actions, a couple of things very distinctly are going to happen, firstly the margins are going to go up because when one has 1,30,000 tonne per annum across a fixed cost, which remains more or less static, you cover your fixed cost because you are far more efficient. Secondly they are going to make reasonable savings in terms of cost of production and thirdly their paper is now environmentally clean, they will be able to export in a much bigger way than before. Combination of these three factors are going to translate into superior earnings from 2008-09 onwards and this is what most investors are not prepared for, which is where the bargain is. The bargain is present because most people are not looking at it and that holds true for Himatsingka as well as for Sirpur Papers.
Q: What kind of run rate in earnings are you factoring in for Sirpur and where do you see price heading because that’s going to be the key for Sirpur or any other paper stock?
A: I’ll run through the numbers for you, I’m not going to predict what’s going to happen to the stock, but I’m going to leave it to the people. What numbers I have got in my head for Sirpur in the year 2008-09, one could look at the topline of Rs 450 crore. Sure the company is having some operational issues at the moment, but I reckon that they’ll be sorted out in a month’s time, so 2008-09 is when the action happens. You got a topline of Rs 450 crore and my estimate is that the EBITDA should be somewhere between 20-25%.
I’m not going to say anything more than that, people are good in their math and will get what I’m talking about and let me leave the price estimation to them because it could be significant. The amazing thing is that when we get into upside we are never accurate. Predicting upsides has become as dangerous as predicting downsides.
Disclosure: I hold Sirpur Papers.
Source: Moneycontrol.com
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