Daljeet Kohli is a wily stock picker. He knows that if you have to stay ahead of the market, you have to think out of the box and corner the stocks that are presently out of fashion.
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Daljeet’s last few picks demonstrate this thinking. Godavari Power, Meghmani Organics, Prism Cement etc are examples of stocks that were shunned when the economy was down. However, now that the economy is reviving, these stocks are also coming into the radar of investors. We need to be ahead of the crowd and position ourselves in advance in these stocks is Daljeet’s thought process.
Pennar Industries is Daljeet Kohli’s latest stock pick. Pennar industries Ltd is a leading engineering company manufacturing Cold Rolled Steel Strips, Precision Tubes, Cold Rolled Formed Sections, Electro Static Precipitators, Profiles, Railway Wagons & Coach components, Press Steel components and Road Safety Systems. It is diversifying from a steel manufacturer to a value added steel and pre-engineered steel buildings manufacturer.
Daljeet explains that all of Pennar’s businesses are directly linked to the overall economy. The sluggishness of the economy has meant that since the last 4 years, capacity in all segments is underutilized due to lack of demand.
However, this is where the opportunity arises. When the economy recovers, Pennar has immense operational leverage to take benefit of the spurt in demand, Daljeet emphasizes.
Daljeet also points out that Pennar Industries does not have significant long term debt (D/E Ratio of 0.40x). All the debt is working capital related. Hence even if the economic recovery is delayed, Pennar will remain insulated.
Daljeet also points out that the major growth driver for Pennar Industries is the Pre-Engineered Building Systems (PEBS). Pennar is the 4th largest player in the country in this field. As the concept of pre-engineered building products is catching up fast in India (anyone setting up an industry now would look for early commissioning of plants, PEBS is poised for abnormally strong growth), he adds.
As to valuations, Daljeet explains that at the CMP of Rs.47 (on Sep 4 2014), Pennar Industries is trading at a P/E multiple of 8.8x FY15E and 5.9x FY16E earnings estimate, which is well below its 14.3x – three year historical average. He notes that the average ROE for the past 3 year has been 12.9%.In FY15E and FY16E, the ROE is likely to improve to 16.4% and 20.3% respectively on back of increased capacity utilization and margin expansion. On this basis, Daljeet has valued Pennar at a “conservative” PE multiple of 10x to FY16E EPS (Rs. 8.1), which gives the target price of Rs 81, a 70% upside potential from the current price.
Daljeet has also expressed the caution that Pennar is not without risk. A prolonged delay in start of the capex cycle could send Pennar back into the dog house, though the risk of this is low thanks to NAMO.
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