Daljeet Kohli’s secret formula is that he likes to home in on established companies with a good track record and which are quoting at reasonable valuations. Alembic Pharma and Bajaj Finance are good examples of this. Daljeet recommended Alembic Pharma when it was languishing at Rs 49. He correctly anticipated that as Alembic Pharma was doing well and its margins were steadily increasing it was only a matter of time for the stock to get a re-rating from the market to bring it on par with its peers Ajantha Pharma, IPCA Laboratories etc. Well, at the CMP of about Rs. 191, Alembic is today the second best pharma stock performer in the market (the first being Ajantha Phara) and it has given multibagger gains to Daljeet’s Kohli’s faithful followers.
In J. B. Chemicals, his latest stock pick, Daljeet Kohli has adopted the same gameplan.
Let us see what it is about J. B. Chemicals that has appealed to Kohli.
The first point is that thanks to the New Pharmaceutical Pricing Policy (NPPP) or DPCO 2013, J. B. Chemicals margins are slowly but steadily inching up. Evidence of this can be seen in the September 2013 quarterly results where the gross margins have expanded 540 bps YoY and 477 bps QoQ.
The second point is about the valuations. At the CMP of Rs. 110 J. B. Chemicals is trading at a PE of about 10 times its TTM EPS which is not expensive for a pharma stock with predictable earnings especially given that it has cash of about Rs. 65 per share in the Balance Sheet. If you do a bit of crystal ball gazing then the P/E will be about 7.7 times FY14E EPS & 6.2 times FY15E EPS.
According to Daljeet Kohli J. B. Chemicals can be valued on a SOTP basis at Rs 149 (Rs 78 for core business + Rs 65 from cash + Rs 6 for OTC supply to J&J).
The bottom line of the thesis is that J. B. Chemicals is presently undervalued and represents a strong buy. Also because of the cheap valuations your downside risk is limited while there is huge potential upside.