[T.S.R:14447] MUDAR PATHERYA, Investment Advisor is bullish on Somany Ceramics and MSP Steel & Power.

MUDAR PATHERYA, Investment Advisor is bullish on Somany Ceramics and MSP Steel & Power.

Here is a verbatim transcript of the exclusive interview with Mudar Patherya on CNBC-TV18.

Q: Starting with Somany Ceramics, the stock you like. What is the story there?

A: It's number two in the industry, as far as installed capacity is concerned, and I am pretty surprised that it's only quoting at a marketcap of nearly about Rs 140 crore. So, number two in the ceramic tile industry, marketcap of Rs 140 crore, that's my fundamental point of interest. Thereafter, I am very pleasantly surprised to find that the earnings performance is actually supporting the fact that it's an extremely low price counter.

For example, I think the company has arrived at an inflection point, it has reported gross revenues of about Rs 560 odd crore for '09-'10. This year because of couple of expansions have taken place, revenues are going to be about Rs 750 crore gross and next financial year, which is about '11-'12, there should be revenues of nearly about Rs 1000 crore.

I put this company at an EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) margin of about 11.5-12%. If you take 12% on the higher side and you take a projection of nearly Rs 1000 crore for '11-'12, you are looking at Rs 120 crore of EBITDA, marketcap of only Rs 140 crore, extremely interesting and equity capital only 7 crore.

The Somany's are the kind of people who probably reward shareholders with a very liberal bonus issue. I have no access to privilege information, I do not know anything. I only surmising that over the next six months, maybe a year there could be a bonus coming up in this because the equity is only about 7 crore. It can't even get NSE listing at this point. So I think there is a lot of upside in this counter because there is volume growth happening, there is also a marginal value growth, which is actually marginal growth happening and at this price it's extremely low

Q: What are peer valuations in this space, if we compare with number one listed player in terms of valuations? What do you think is a fair value for Somany?

A: Kajaria is quoting at a marketcap of about Rs 450-500 crore. If that's number one then the number two deserves something better. You cannot have a gap of Rs 500 and Rs 140, which is not to say that Kajaria is overpriced. Let me be an optimist and tell you maybe Kajaria is rightly priced, in which case Somany is wrongly priced. So I think there is a mismatch. I think this mismatch needs to correct with Somany moving closer to Kajaria rather than Kajaria coming down to Somany's level.

Q: The other one you have got is completely from other sector, MSP Steel and Power?

A: Completely overlooked. I think that there are some counters that are just about an inflection point, breakout is going to take place or has taken place in performance and the world has missed it. I think MSP Steel is one of those companies. I have been going through the last quarter's performance. They have reported an EBITDA of Rs 25 crore. I am very gratified to see an EBITDA margin of 20% and have also kept a little track of the news clipping that have been coming out. The structural power plant has gone on stream in the last quarter of the last financial year, one of the power plant come on stream in July and the palatalisation has also gone on stream sometime in December last year.

The palatalisation is a bit of a kicker because it gives you margin. The structural will give you volume. I see a very interesting play emerging. I would expect that top-line revenues to be somewhere around Rs 700-800 crore in the current year. I do not know why it's a very simple logic that applies that even if your EBITDA margin comes down from 20% to 18%, you still got Rs 700-800 crore of top-line with an EBITDA margin of 18-20%, which I think is very interesting. Then going ahead I see a top-line of nearly about Rs 1,000 crore. So we have Rs 1000 crore of top-line and worst comes to worst even if you at 18% EBITDA margin, you still got Rs 180 crore of EBITDA and the current marketcap is close to about Rs 200 crore. So the level of safety, the comfort level is very significant because if you take a two year perspective then from an EBITDA perspective the investor is getting his money back. I think that makes it a very compelling investment proposition.

Q: What do you think it's good for in terms of earnings and a price that it could then support?

A: The interesting and the tricky part here is that prices are decided on the basis on stands today. But if you take a two year perspective where they are at Rs 1000 crore and then they announced another expansion or another backward integration or they have already bid for some coal blocks, if that commercialization begins to happen then you got an entirely new perspective emerging.

But to answer your question let me say that if this company were to be priced to about three times EBITDA, which means that you are looking at an EBITDA of Rs 200 crore maybe two years from now and it's priced three times EBITDA then you are looking at Rs 600 crore of marketcap. The market at this moment is close to about 200 crore. So there could be, very safely a trebling in about two years. I think it's very interesting because the stock is priced only Rs 35 and Rs 35 goes up to Rs 100 makes money for a lot of people.

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CA.RAJESH DHIRAJLAL DESAI
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