Investment advisor, Sanjay Chhabria discusses his picks from the midcap space - Bannari Amman Spinning Mills, Murudeshwar Ceramics and Zodiac Clothing.
Sanjay Chhabria believes that Bannari Amman is a long-term play in the textile sector. Chhabria thinks that it is better to hold on to the stock and advises investors to buy it at lower levels.
Chhabria feels that Murudeshwar Ceramics is likely to be one of the main beneficiaries of the ongoing construction and infrastructure boom in the country. He further states that the company enjoys one of the highest operating margins in the industry, mainly because it is into manufacturing of vitrified tiles, which is a highly valued product.
As regards to Zodiac Clothings, Chhabria says that the company has lined up aggressive expansion plans for its retail stores, riding on the organised retail boom going on in the country. He also informs that the stock trades at a very cheap valuation of 7.5 times FY07 earnings.
Excerpts from CNBC-TV18's exclusive interview with Sanjay Chhabria:
Why do you like Bannari Amman Spinning Mills?
We had talked about this stock last month. At that time, the stock was quoting at around Rs 95-100 levels. Now the stock has gained around 30% in the last one month.
At present, I have a 'hold' call on this stock. The stock has a good pedigree of Coimbatore-based Bannari Amman Group and at that time too, I had mentioned that this is a long-term play in the textile sector.
It came as an IPO in October 2005 at Rs 135 per share to expand its spinning and weaving capacities and to foray integration into processing, garmenting and home textile facilities. It has invested in windmills for power generation also. So at the moment, I think it is better to hold on to the stock and investors could buy the stock at lower levels.
What is the story in Murudeshwar Ceramics; why do you like it as a story?
Murudeshwar Ceramics is likely to be one of the main beneficiaries of the ongoing construction and infrastructure boom in the country. The company is one of the major players in the ceramics industry with a market share of around 11-12 per cent.
The company is into highly growing vitrified tiles market with a 30 per cent market share. The company enjoys one of the highest operating margins in the industry, mainly because it is into manufacturing of vitrified tiles, which is a highly valued product.
The company has an operating margin of around 33 per cent, it is also because it's having a gas-based plant; it is using gas at its plant in Karaikal and also it has captive quarry mines in Karnataka, which helps in improving margins and keeping costs low.
The company sells under the brand 'Navin Diamond Tile' in the market and has a strong presence in the southern market, where it sells 60 per cent of its products, 25 per cent of the revenue comes from the western market and the rest comes from the northern and eastern markets.
Given the outlook for the ceramic industry, it is expected to grow at a 20 per cent CAGR over the next two-three years propelled by the infrastructure and construction boom. It is expanding its capacity in its two plants; one at Karaikal and the other at Hubli. At Karaikal, it is increasing its vitrified tiles capacity and it is restarting its ceramic tiles division at Hubli.
Coming to financials for the year ended March 2006, the company reported 14 per cent rise in net sales to Rs 191 crore whereas net profit increase of 36 per cent to Rs 24.22 crore (Rs 242 million). The EPS stood at Rs 16 and the dividend declared was 20 per cent.
Going forward, the operating margins is likely to drop as the company will enter the ceramic tiles business, once again. But inspite of this, the company will continue to enjoy one of the highest margins compared to its peers in the industry.
As the infrastructure and retail boom is expected to continue for at least next two years, the company is expected to show robust growth during this period. At six times FY07 earnings with strong revenue growth and robust earnings expansion, I think the stock should come under higher P/E multiple.
Zodiac Clothing is your other pick - tell us about the financials of this company and your earnings expectations?
Zodiac Clothing is one of the oldest branded garment exporters having a decent retail presence in the country. It is considered to be one of the finest quality shirt makers from the finest fabric sourced worldwide.
The company, promoted in the year 1954, is today a Rs 215 crore (Rs 2.15 billion) vertically integrated and marketing led clothing company that controls its entire operations- from design to retail.
The company has a very derisk business model, as 90 per cent of its production is pre-sold, over 70 per cent of the production is sold in the export market all of which is pre-sold, and the balance 30 per cent is sold in the domestic market.
The company caters to the middle and higher end of the garment market where the demand is good and price realisations are better. This segment requires high focus on designing.
For this purpose the company has established design studios in New York, London and Dusseldorf, which helps it to keep abreast with the latest fashion trends. The company has manufacturing facilities at Gujarat, Karnataka, Daman and Dubai. The total capacity of all the facilities put together is around 60 lakh (6 million) garments per annum.
Coming to retail initiatives of the company, the company currently sells through 1000 multibrand retailers and around 52 Zodiac exclusive showrooms spread across the country.
Riding on the organised retail boom going on in the country, the company has lined up aggressive expansion plans for its retail stores. From the current 52 stores with a total retail area of around 40,000 sq.ft, the company is thinking of expanding to 73 stores with a total area of 54,000 sq.ft by March 2007. This should grow to around 115 stores and area of 86,000 sq.ft by March 2009.
Coming to the financials, the company has been a steady performer for the year ended March 2006, on a net sales increase of 38 per cent, the company posted a 53 per cent rise in net profit to Rs 13.37 crore (Rs 133.7 million) on equity of Rs 8.36 crore (Rs 83.6 million).
The equity has increased in November 2005 after the 1:1 bonus issue. So EPS comes to around Rs 16, and dividend declared was good a 50 per cent. The stock currently trades at 11.5 times FY07 earnings.
Another important point to note is that the company holds around 3 per cent stake in Shopper's Stop, which if valued at market value, would contribute to around Rs 62 crore (Rs 620 million) of Rs 75 per share. So out of Rs 214 per share, Rs 75 per share comes from Shopper's Stop only.
So excluding this, the stock trades at a very cheap valuation of 7.5 times FY07 earnings. Also, the branded retail initiative of the company will hold the company in a good state going forward.
Any positions you would have to disclose in any of the three stocks that you spoke about?
Personally I do not hold any positions, but some of my subscribers to the newsletter might be having some positions in these stocks.
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