(Interview Transcript)
Ashish Chugh, Invesment Analyst & Author of Hidden Gems gives his views on two good stocks to bet on.
Celebrity Fashions, a company which is into garments, is a stock for long-term investors with an appetite for high risk, says Chugh
Software Technology Group, STG, an IT education Company, has taken many recent initiatives which have put the company on a growth path, it is a stock worth banking on he says.
Excerpts from CNBC-TV18's exclusive interview with Ashish Chugh:
Q: What do you like about Celebrity Fashions?
A: Celebrity Fashions sells garments under the Indian Terrain brand. This company came out with an IPO in December of 2005 which was priced at Rs 180. The company is focused mainly on export of garments, it supplies to most leading international brands which includes GAP, Armani, Timberland, Levi’s, Dockers and Diesel.
The problems of the company started because of appreciation of rupee since more than 80% of the revenues of the company come from exports. This company was severely affected due to the appreciation of the rupee.
If one takes a look at the strengths of the company, it is capable of producing quality products since it supplies to brands like GAP, Armani and most other international leading brands. So the company is capable of producing a quality product. Also the company’s domestic brand which is Indian Terrain is well established in the Indian domestic market and it is sold through most retail chains including Shoppers Stop, Pantaloon, Globus and many other retail chains.
The company has got high sales to market capital ratio. If one compares this company with the peer group one will find that this company has got one of the highest sales to market capital ratio. The reason being that the company is a loss making company and even though the company has been registering good sales it has not been showing much on the bottomline rather there is a loss as far as the company is concerned.
If one looks at the problem areas for the company the first problem area is obviously the appreciation of the rupee since this company was export focussed, this severely affected the financials of the company. Also last year the company made an operating profit of about Rs 18.5 crore out of which about Rs 15 crore was made towards interest cost. So the interest cost is very high and interest cover for this company is very little.
The third major problem with the company is its high salaries and wage bill. If one compares the salary and wage bill of this company with other peer group one will find that the wage bill is substantially higher than the peer group.
What this company is doing to tide over these problems is (1) as far as the rupee appreciation is concerned the company is now focusing more on the domestic market. (2) The company is expanding its distribution reach and also having more retail stores. (3) The company is also opening more exclusive Indian Terrain stores.
The company has also finalised the sale of one of its units for a total consideration of about Rs 42 crore. This company is shifting one more unit which is located in Chennai to another location and they have plans to sell the land and building which is located in Chennai which has now become prime.
With these the company will be able to payback its debt and reduce the funding cost, interest cost which will be good for the company in the long run. With the sale of units, the wage bill of the company will come down slightly, but the company has to work hard on reducing the wage bill significantly from the levels where it is currently there.
The fact that the management has got its thinking caps on and it is sensitive to the needs of the market, to the changing business scenario and is willing to restructure itself, gives a confidence on the management of the company. The results of the new initiatives may not come in immediately, they may take few quarters. This is where I would like to caution the investors, that since the results are not going to come in just one quarter it may take few quarters to first reduce the loss and then the company come back again to the profit balance sheet.
So it is recommended for investors with an appetite for higher risk and in case the management is able to turnaround. The company is already well established, doing high turnover and the stock can appreciate significantly from the current levels. In case nothing happens then at the current valuations one will have many takers for the company.
So this is a stock for long-term investors with an appetite for high risk because of the uncertainty which the company is faced with right now.
Q: Software Technology Group (STG) is the other stock that you like and this is from the IT space? What sort of price targets you have set on it?
A: STG is basically an IT education Company. This company went through a bad patch from 2001 till 2006. But given the recent initiatives which have been taken by the management this company seems to be back on track now and it is now on a growth path.
To give a background this company has got three business divisions; first is called the Software Solutions division where they are involved in providing IT solutions to various corporate. This company has got its development centers located in Gurgaon and Kolkata and they also have a center located in California.
The second business division is called the IT Education division. The company’s brand which is STG is quite established in the domestic IT market. As of now this company has got about 60 education centers across the country. The management has setup an ambitious target to increase it four fold in the next three years and they are working aggressively towards adding more centers.
Besides, addition of centers they have also modified their curriculum to cater to the needs of domestic the IT market. They have introduced new courses. For example they have introduced a course called Final Touch which is basically a course which bridges the gap between the IT needs of the corporate and the formal engineering education. It is meant for people who have graduated in engineering and MCAs and gives them a final finishing. It’s kind of a finishing school where they make the students ready to take on the corporate IT scenario. So they have modified their curriculum.
The third business division which they have is the software implementation division. Here the company has tied-up with various corporates like Microsoft, Oracle and Infosys and they are involved in system integration and IT implementation for these companies. For example Infosys has got a product called Finacle which they have installed at various banks. This company is a partner with Infosys and they are installing that product and providing after sale support for Finacle. So these are the three business segments which the company is doing and besides this the company has taken a numbers of new initiatives also.
Disclosure:
I and my family have investments in the company.
Ashish Chugh
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