Stock Idea: EIH

This stock looks good from a fundamental and strategic perspective. This is a company which is available very close to its two year low currently at close to Rs 80. They own and operate hotels under the Oberoi and Trident brand name. They have close to 30 properties which they own and manage out of which seven properties are located outside India and about 22-23 properties are in India.

They have close to eight-10 new propertie, which are under various stages of development which will take the total number to 40 properties over the next few years. Besides the hotel business, they also are into other allied businesses like cruise liners, they own a travel agency by the name of Mercury Travels, they are into flight catering and aircraft charter services.

At the current market price of Rs 80, the marketcap of the company is close to Rs 4,500 crore with a debt of close to Rs 1,400 crore on the balance sheet which means the enterprise value is close to Rs 6,000 crore. The enterprise value looks small given the valuation of various properties. In this kind of market you may have a number of companies which fit into these criteria and not just EIH.

I find investment in EIH maybe fruitful from a strategic point of view also because two large corporate houses hold the Reliance Mukesh Ambani Group acquired shares from the promoters about six months back at close to Rs 184. They currently have about 14.8% stake. At the current price of Rs 80, the stock is available at about 60% discount to the price at which Mukesh Ambani Group bought the shares from the promoters.

In case ITC increases it’s holding by 0.02% or Reliance by 0.2% that will trigger a mandatory open offer as per SEBI guidelines. For an investor looking for 25-30-40% return in this stock, given the fundamentals and given the market, the stock has been depressed and 30-40% return over a one year period may not be difficult.

However, the bigger trigger would be, the number of unknowns and uncertainties with regard to whether they will make an open offer and under what circumstances and what could be the timing or trigger for the open offer. Those could be the unknowns but more money could be made by investors who choose to just buy and take the risk of the unknowns at this point in time. Those looking for 25-40% returns in this stock may not find it difficult given the current fundamentals.

the extreme short-term, however, this stock may be under pressure because of the fact that the company just come out with the rights issue at about Rs 66. There could be supply pressures when those shares hit the market but that kind of an opportunity should be used to accumulate the stock at about Rs 80 or in case it declines to about Rs 75.

Source: Internet (moneycontrol.com by Ashish Chug)

Stock Idea: Facor Alloys

This is a Rs 1 face value stock which is available at Rs 4.50 paise. This is a company which manufactures ferro alloys. The company has got its plant located in Andhra Pradesh with a capacity of about 72,000 tonne per annum. They came into existence upon the demerger of the Facor Group in 2004.

The company operates in a sector which is highly cyclical. We have seen a company like Ferro Alloys make humongous amount of profits during the boom cycle and also make heavy losses when the cycle turns negative. From that perspective, the margin of safety and risk management in these kinds of stocks becomes very important.

Second is, this company does not have any captive source of raw material supply or power supply which are two critical input costs as far as the ferro alloys industry is concerned. This company is assured raw material supply because it buys raw material from one of the group companies but that is done at market related prices. In case there is a scenario that the finished product cost comes down and the raw material cost goes up, that kind of a scenario can hurt the company badly.

If we look at the financials of the company, in the first nine months of the current financial year, the sales have increased by close to 60% to about Rs 300 crore. The company has made an operating profit of about Rs 40 crore, paid a tax of about Rs 13 crore for the first nine months and made a profit after tax (PAT) of about Rs 26 crore which the annualised EPS is going to be about 1.5 to 1.6. So at the current price of about Rs 4.50 paise this stock is traded at a PE multiple of less than 3.

This is a debt free company. Their current marketcap is close to about Rs 88 crore. They have got cash which is lying in fixed deposits of close to Rs 50-52 crore. They also have got investment in a group company of about Rs 15 -16 crore. If we value that investment at par, you get a cash equivalent of Rs 65 crore. These are the figures as on March 31, 2010.

You are practically getting this company at an enterprise value of about Rs 25 crore. They have made a PAT of about Rs25 crore in the first nine months. If I add that profit into the cash which is there in the company, I am getting this company virtually at zero cost. This is a company which provides margin of safety. They also made a PAT of close to Rs70 crore in 2008 which was a boom year for the ferro alloy industry.

As a current valuation, the downside practically looks very negligible. At the same time, the upside may also be capped at about 50-100% from the current levels because this company does not have access to its own power and raw material source. In case they are able to do that there could be more upside.

Source: Internet (moneycontrol.com by Ashish Chug)