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Tuesday, June 15, 2010

Tata Metaliks - Small Cap High Dividend Stock To Buy

This is another small cap high dividend stock to buy, discussed by Ashish Chugh, author of hidden gems.

Tata Metaliks is a part of Tata Group and this has got two manufacturing plants. One is located in West Bengal and the other one is at Redi in Maharashtra. The total capacity is about 6.5 lakh tonne of pig iron and the company claims to be the world’s largest producer of pig iron. This company was performing extremely well till FY08. The company was making profits between Rs 30 and Rs 70 crore for say last four-five years. The company was also making high dividend payments of between 60-70% on a regular basis.

FY09 was a bad year for the company. Thanks to the meltdown in the metals which we saw. This company made loss of about Rs 150 crore in FY09. After that the things are beginning to improve. If you see the numbers for the last three quarters the company has made a profit after tax of close to Rs 60 crore. In the March quarter the company has done a PAT of about Rs 24 crore.

There are two major things that have happened in the company in the last two years which are going to be hugely positive for the company over a longer term period. One is related to the backward integration and the other one is related to the forward integration. As far as backward integration is concerned company had got licence for about 155 hectors of iron ore mines in Maharashtra. So this is going to reduce the cost of raw material for the company and also it will enable the company to insulate itself against fluctuation in the iron ore prices.

The second is that company has put up a ductile iron pipe manufacturing plant in joint venture with a Japanese company which pig iron will be main raw material for manufacture of ductile iron pipe so the company has gone in for higher value added products where the margins are going to be high.

This is a company where good potential for profits exist. In the March quarter the company has already done a profit after tax of about Rs 25 crore. Equity capital of the company is about Rs 25 crore which means an EPS of Rs 10 in one quarter. Company has the potential to do about Rs 80 crore of profit in one year which means an EPS of close to Rs 30-35. Once the ductile iron pipe manufacturing and the backward integration is also operational the profits can go up much higher. Market cap of the company at current price is about Rs 300 crore.

So you have a Tata Group company which is available at four years of its profits on conservative basis and as higher value addition and backward integration go into operation the profits can only increase. The valuation on the current price is very attractive. There are concerns because the company had skipped dividend last year owing to the loss which it suffered. This year the company has till now not announced any dividend, but these negatives should be utilized by the investors to buy stock at lower levels because the long term potential of the stock looks very good.

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