Buy these Two Top Stocks which will make you rich

Head of PCG of Emkay Share & Stock Brokers, Avinash Gorakshakar discusses his favourite picks - GMM Pfaudler and Manugraph.

Gorakshakar maintains a 'buy' on GMM Pfaudler at Rs 676 with a target price of Rs 1,046. He likes this stock because it is a market leader and it caters to three large growing sectors like pharmaceuticals, specialty chemicals and agrochemical space.

He gives a buy call on Manugraph at Rs 230 with a target price of Rs 380. He expects  the company to record topline growth of roughly about 20-22 per cent to about Rs 387 crore next year. He further informs that this company is a debt free business.

about GMM Pfaudler

GMM Pfaudler is basically a niche player in the glass-lined chemical reactor market. It is a 51 per cent subsidiary of Pfaudler US, which is a world leader in the glass-lined reflector equipment market.

We like the stock because it is a market leader and it caters to three large growing sectors like pharmaceuticals, specialty chemicals and agrochemical space. This business is a niche market and except for Nile Limited, which is a domestic competitor, there is no other company in the market, which caters to this business.

As far as the business is concerned, the specialty chemical market and the pharmaceutical market will provide large triggers for the company. The company recorded a revenue of roughly about Rs 102 crore (Rs 1.02 billion) last year with a bottomline of Rs 12 crore (Rs 120 million), and a recorded EPS of roughly Rs 42 for 2006.

This company has got an equity capital of Rs 3 crore (Rs 30 million). This is a debt free business and very high return on capital and return on equity, kind of return ratios, which is roughly about 30 per cent and 40 per cent.

Going forward, the company has got a decent capacity build up. They do not require large capex to be incurred over the next 12-18 months. So our sense is that the company will continue to remain debt free and whatever cash, it actually throws up, is likely to be put up in liquid investments. In fact, the company holds liquid investments to the tune of about Rs 26 crore (Rs 260 million), as of March 2006.

Coming to valuations, our sense is that the company would be recording 30 per cent growth in topline for 2007, which is about Rs 132 crore (Rs 1.32 billion) for 2007 and 2008. We believe that company should average out a topline of roughly about 25-26 per cent, which works out to about Rs 165 crore (Rs 1.65 billion).

Manugraph is the other stock

Manugraph is one of the largest manufacturers of the offset printing equipment machinery in India. It controls about 70 per cent of the market and its clients are all the frontline newspapers. These include The Times of India Group, Hindustan Times, Indian Express and Deccan Chronicle.

In fact, there is no other newspaper, which probably Manugraph has missed out. But what really excites us about Manugraph is the fact that its business model is firmly in place. It is into a niche segment, where technical skill sets are very important and price competitiveness is also very critical.

The company competes with several European as well as American manufacturers in the global market. If one observes the company's topline growth in the last three-four years, there has been a consistent increase of roughly about 24-25 per cent.

More importantly, in the last four years, the asset turnover levels of the the company have gone up significantly. Working capital cycle has been considerably reduced and this has been amply reflected in the EBIDTA margins. Today, this company enjoys an EBIDTA margin of 26 per cent, which is typically very high in the engineering space. This was just about 10-11 per cent about four years ago.

So the company has managed to keep the technology in line with the customers requirements and also in line with the financial and capital structure side, the company has done a pretty good job. In fact, this company earned a return on capital employed of 79 per cent for 2006 and return on equity of around 61 per cent. It is a debt free business. The company has got a very small equity capital of Rs 6 crore (Rs 60 million).

Last year's revenue was roughly about Rs 322 crore (Rs 3.22 billion), on which the company earned EBITDA of Rs 83 crore (Rs 830 million) and bottomline of Rs 55 crore (Rs 550 million). The company's share is of face value Rs 2. The company's EPS for last year was Rs 18.

We believe that next year, the company should record topline growth of roughly about 20-22 per cent to about Rs 387 crore (Rs 3.87 billion) and bottomline of about Rs 70 crore for 2007, which works out to an EPS of Rs 24. For 2008, we expect that the topline should be about Rs 450 crore (Rs 4.5 billion) plus and bottomline of about Rs 84 crore (Rs 840 million), giving an EPS of around Rs 28.

The company has another opportunity in the export market. The company is a very large exporter already. It exports about 32 per cent of its revenues to very developed markets like Italy, Germany and France. But now the company is seriously looking at markets like China and North America, which incidentally are the largest markets for the newspaper market. We believe that these initiatives would actually bring rewards in the next 18-24 months.

Finally coming to the valuations, as I earlier said, the company is a debt free business. The company is likely to throw a lot of free cash in the business. Capex is also quite moderate, the management has indicated that the capex would not be more than Rs 20-30 crore (Rs 200-300 million) over the next two years. Therefore we feel that the cash element per share on the balance sheet would be roughly to the extent of Rs 27 by 2008 on a face value of Rs 2.

As far as multiples are concerned, the stock trades at a multiple of roughly about 9 times at a price of around Rs 230 discounting 2008 numbers. On EV/EBITDA basis, it trades roughly at EV/EBITDA of 5 times for 2008.

For a company, which has shown a return on capital and return on equity in excess of 60 per cent, and which has consistently changed the balance sheet and improved the quality of earnings over the last three-four years, we believe that this company should not be looked purely as a printing equipment manufacturer.

But it should actually be compared with other engineering players. It is a complete solution provider; it is not just a printing manufacturer, per se. Therefore our belief is that the stock should get re-rated. We have given a buy at Rs 230 with a target price of Rs 380.

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