Ajay Relan’s Stock Pick MPS Gives 60% Gain But Is Still A Great Buy

Business Outlook did a very sensible thing by asking 15 stock wizards to indicate their best stock picks. Ajay Relan had no doubt about his best stock pick. It was publishing powerhouse Macmillan Publishing Solutions or MPS. At that time, MPS was quoting at Rs. 186. He said the stock was at a “tipping” point.

Today, when MPS announced its Q3 FY 2014 results and released an investors’ presentation, delirious investors thronged the counter and caused the stock to trigger the upper circuit limit of 20% on its way to Rs. 295.

The result: Investors who followed Ajay Relan’s brilliant advice were sitting on a 60% gain for just a few months investment.

Now, the important point to note is that if you missed the opportunity, there is no need to feel upset because MPS is still a micro-cap stock (market capitalisation of only Rs. 417 crore) and it has a long way to go.

So, lets’ quickly take note of Ajay Relan’s brilliant analysis of MPS:

(i) MPS has a good business model. It offers a portfolio of services, including software and platform development, content production for books and journals, digital and rich media services and order to cash BPO services;

(ii) MPS has reduced its operating costs by shifting around 500 jobs to Dehradun from its more expensive locations;

(iii) MPS recently acquired the assets of the US-based Element, which is engaged in developing content and products for learners of all ages in a broad range of curriculum and subjects, with specialisation in pre-kindergarten and the kindergarten to standard XII market. The buyout will boost the company’s presence in the United States educational publishing market;

(iv) Nishith Arora’s dynamic leadership has resulted in a dramatic turnaround of MPS. The cost rationalisation measures — coupled with a weaker rupee — have resulted in substantial improvements in profitability. After incurring losses for two consecutive years, the company made a profit before tax of Rs 15 crore in FY12 and Rs 40 crore in FY13. This year, the profit before tax could well be upwards of Rs 60 crore. MPS paid a generous dividend of Rs 10 per share last year, and has already paid Rs 10 as interim dividend this year;

(v) The dividend yield is about 3.36% (presently). The market capitalisation is about Rs. 417 crore (presently). The company is zero-debt & cash-rich. Though the P/E is about 15, it is reasonable when you consider the cash of Rs 20 crore, excess real estate in Bengaluru that when sold can yield Rs 60 crore in cash and income tax refunds of another Rs 30-40 crore due from the government;

(vi) The transformation at MPS is likely to continue in the coming years, with focus shifting from cost rationalising to aggressive revenue growth. The company appears to have the infrastructure and talent to grow rapidly, coupled with aggressive leadership after its acquisition by Nishith Arora.

Ajay Relan’s analysis is very convincing indeed. One should take advantage of market dips and corrections to tuck into MPS in a meaningful manner.

In the meanwhile, you must also check out what stocks the other 10 stock wizards recommended because each one of them has the potential to become a multibagger.