Ashish Chugh unearths hidden gems for your portfolio

Ashish Chugh, investment analyst and author of Hidden Gems is bullish on small cap stocks Acrysil

India andCosmo Films. He advises investors to buy into these stocks with a long-term perspective. Below is a verbatim transcript of the interview. Also watch the video.

Excerpts from Bazaar on CNBC-TV18 Watch the full show

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On Acrysil India This is a very small company, which has created a niche for itself in the product which it manufactures. This company manufactures granite and quartz kitchen sinks, which no other company manufactures in India. It has got a virtual monopoly in the granite and quartz kitchen sink. The products of this company has sold under Carysil brand name and that brand is basically become a premium brand for kitchen sinks. The fact that it is a premium product and enjoys good brand image is reflected in the margins of the company alsothe company enjoys operating margins of close to 25%. The company has recently ventured into the manufacture of stainless steel sinks also, which will give volumes to the company. It may be low margin business but volumes are going to come from the stainless steel sink division. If you look at the financials of the company, FY10 sales were about Rs 46 crore which were down by about 10%. Profit after tax (PAT) was Rs 6 crore. This company has got a very small equity of Rs 3 crore which means an EPS of close to Rs 20. The heartening fact is that this company enjoys not just the high operating margins but high margins at the net profit margin level also. It enjoys net profit margin of close to 14-15%. It has got healthy financial ratios like return on capital employed and return on net worth is close to 45-50%. It is a smallcap company. The dividend declared this year is 40% which means a dividend yield of close to 3% at the current market price. So you have a company which has created a niche for itself which enjoys good operating profit margins, has good return on capital employed and net worth and available at a price to earning multiple of 6-7 on earnings in a year which was not a very good year for the company. Going forward, when contribution from the stainless steel kitchen division also starts to come in the earnings are going to improve. Company with 25% operating profit margin is available at a PE multiple of about six-seven, it is a reasonable valuation. I would like to put a word of caution, one is liquidity and second is the company has got since about 85 to 90% of the revenues come from exports. The earnings from this quarter maybe dented because of what happened to Europe. The advice will be to utilize this opportunity to accumulate the stock at lower levels rather than getting in at higher levels Rs 125 to Rs 135 maybe a good range to accumulate this stock for the long time investor. Disclosure I have got small investments in the stock of Acrysil India.

On Cosmo Films

Excerpts from Bazaar on CNBC-TV18 Watch the full show

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See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

Cosmo Films is a company which manufacturers Bi-axially OrientedPolypropylene Films (BOPP) films and also thermal insulation film. In the thermal insulation film segment this company is the largest player. This company has got two manufacturing plants in Aurangabad, two in Gujarat and besides this the company has got overseas manufacturing facilities in Korea, US and Netherlands. This company has been on a capacity expansion spree. Company has regularly added capacity every year. Last year the company added about 35,000 tonne per annum of BOPP capacity which takes the total capacity to about 91,000 tonne per annum of BOPP. Besides this the company last year acquired a company called GBC in US, which is into value added products and it is more of a forward integration for Cosmo Films. If you look at the financials of the companyFY10 sales were about Rs 963 crore which was higher by 50% compared to FY09. Profit after tax was about Rs 38 crore as against Rs 29 crore. Which means an EPS of close to Rs 21 so at current market price of about Rs 125 the stock is available at a price to earning multiple of about 6.5. The good part is that the company has been a regular dividend payer since 1993. Only during one-year, in between, the company skipped dividend.The company has declared a dividend of 50% for FY10 also. The current price of the stock is come dividend, so at the current price of about Rs 125 you get a dividend yield of about 4%. The stock is available at reasonable valuation, PE multiple of about six to seven and a good dividend yield of 4%. The short-term trigger for the company and the sector can come from the fact that in the last few months there has been an increase in the selling price of BOPP and BOPET without any increase in the prices of raw material which means that this quarter which means that June quarter, September quarter these companies should show higher profits because all the incremental revenues are going to add to the bottom-line of the company. So at the current price of about Rs 125-127, I do not see too much of downside in the stock. You get a regular dividend from this company Rs 5 dividend. So it is something which probably people can buy and hold for an assured dividend yield of about 4%. Disclosure I have got investments in Cosmo Films also.