Investment analyst Ashish Chugh discusses his favourite picks - Swaraj Mazda and Sterling Holiday Resorts.
Chugh states that legal issues in the company have affected Swaraj Mazda. He informs that the profits of the company, which were about Rs 24 crore for the year ended March 2005, have dropped to about Rs 17 crore. Hence, he feels that this uncertainty provides the long-term investor with an opportunity to buy the stock at lower levels. He feels that the long-term potential of the company remains good.
As for Sterling Holiday Resorts, Chugh believes that once this company starts making profits or if the company sells its stake to somebody, it will be at a much higher price. Once that happens, Chugh feels that people will be more convinced about the potential of the company.
Excerpts from CNBC-TV18's exclusive interview with Ashish Chugh:
Swaraj Mazda is a stock that you like quite a bit. Take us through that story and the valuations.
It was promoted by Punjab Tractors Limited and Mazda Motor Corporation of Japan, way back in the late 80s. Mazda Corporation sold out its stake last year in favour of Sumitomo Corporation.
Punjab Tractors also diluted a part of its stake in favour of Sumitomo at a price of Rs 400 a share. There are five major shareholders in this company, which together hold about 80 per cent of the stake.
These are Sumitomo Corporation, which holds about 41 per cent and Punjab Tractors is 14 per cent. Besides these two companies, CDC, Actis and Reliance Mutual Fund also holds majority stake in this company. Together, these five shareholders hold about 80 per cent stake in this company.
This company manufactures light commercial vehicles and specialty vehicles like ambulances, police vehicles, water tankers and such structured vehicles. The stock price of this company touched a high of Rs 435 in January 06. But it dropped to more that 50 per cent from those levels, primarily because of a management tussle between two groups of share holders.
This tussle is because of some shares of Punjab Tractors, which were sold in favour of Sumitomo Corporation last year at Rs 400. One group of shareholders did not want those shares to be sold to Sumitomo Corporation because they had a share in Punjab tractors. Now there is an uncertainty in the minds of people as to what will happen. And because of that uncertainty, operations of the company has suffered.
The profits of the company, which was about Rs 24 crore for the year ended March 2005, has dropped to about Rs 17 crore. The company has reduced the dividend from 75 per cent to 55 per cent. But again, this uncertainty provides the long-term investor an opportunity to buy the stock at lower levels.
The long-term potential of the company remains good. There are some indications, which are a pointer to the good events that are happening in the company. In a recent move, this company has tied up with Isuzu Motor Corporation of Japan wherein they will use the manufacturing facility of Swaraj Mazda to manufacture Isuzu vehicles in India.
These vehicles will be sold through the dealer network of Swaraj Mazda. So there is of course an uncertainty because of which the operations of the company are suffering. But I believe that this may be a temporary phenomenon and the long-term investor can use this uncertainty to acquire the stock at a cheap price.
The fact is that the five major shareholders have about 80 per cent equity, leaving very little float in the market. So as soon as there is any good news, the stock can shoot up really fast because the float is limited.
Sterling Holiday Resorts is the other stock that you want to talk about. Tell us the story and more importantly, explain the financials of it and what do you expect it to report?
Sterling Holiday Resorts pioneered the concept of time-share in the country. This company went through a very bad phase in the late 90s and saw its losses mounting every year.
However, in the last three years, the company management has been taking various steps to bring the company back on track. The first one is that this company, at one point of time, had a liability of more than Rs 200 crore from the financial institutions.
The company has paid off more than 50 per cent of this liability and the company has chalked a three-year plan to pay the balance liability over the next three years. The funds will be raised primarily through the sale of surplus assets by the company.
The positive factor about this company is that this company owns 13 mid-sized hotels, The Resort, at various places in the country. These include resorts at Goa, Kodaikanal, Lonavla, Ooty and various other places.
Of late, we have been seeing a lot of interest from various Indian and foreign hotel chains. Everyone wants to set up a chain of budget hotels in India, be it the Tatas, ITC or foreign hotel chains.
Most of these hotel chains are aggressively scouting for land for making the hotels or ready-made properties, which can be converted into hotels. Sterling provides an excellent vehicle for them to get into the segment at a very low cost and without any gestation period.
At the current price, the market cap of the company is just Rs 150 crore. One is getting 13 ready properties for a market cap of just about Rs 150 crore, which could be a juicy valuation for many players who want to enter into this segment. So I believe that there is a huge potential within the sector and that is why so many players are getting into this sector. At a market cap of Rs 150 crore, the stock looks grossly undervalued.
The financials are nothing great to go by, as of now. This company has been making losses for the quarter ended June 06. They reported a turnover of close to Rs 10 crore and made a loss of Rs 70-80 lakhs. But there is a huge potential in the sector.
Once this company starts making profits or if the company sells the stake to somebody, it will be at a much higher price. Once that happens, then people will get more convinced about the potential of the company. And that time, the stock will not be available at Rs 60. So at Rs 60, the downside looks very limited but the options available with the company are many. I believe they will be able to turn around the company.
Any disclosures?
It will be safe to assume that me or my clients would be having a position in these stocks.
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