Q: Uflex is your pick today?

A: The stock of Uflex has plummeted from a high of about Rs 325 to the current price of about Rs 155 in about three months time. This has been on account of negative newsflow. The first was the news of the arrest of the chairman of the company in the month of December. Then was the Egypt crisis, where Uflex has got its manufacturing operations. Inspite of the company's profit rising five fold from Rs 46 crore to Rs 250 crore in the quarter ending December, the stock fell from about Rs 325 to Rs 155.

Uflex Limited is the largest integrated flexible company in India and one of the largest in the world. The company has got manufacturing operations in India, Egypt, Mexico and Dubai. They have aggressive plans to setup operations in other countries and are currently undertaking expansion projects at Mexico, Egypt, Jammu and Poland. Mexico phase II is going operational in the month of June 2011. In Jammu, the expanded capacity is going operational in September 2011 and Egypt is going operational in December 2011. It may get delayed because of the current situation in Egypt.

For the first nine months of the current financial year, this company has registered sales of about Rs 2,600 crore, which is up by about 50%. Profit after tax (PAT) for nine months, is up by close to 250% from Rs 144 crore to Rs 515 crore. The current equity of the company is about Rs 72 crore.

I am taking a conservative scenario, on the impact of the Egypt crisis on the operations of the company and also the impact of the softening finish product prices, they can conservatively do a PAT of about Rs 150 crore in the quarter ended March 2011 which means that the full year EPS is going to be on a conservative basis at about Rs 90.

My hunch is that the EPS can be anywhere between Rs 95 to Rs 100. At the current price of Rs 155, you are getting the stock at PE multiple of just about 2. Having a profit of Rs 700 crore and marketcap of just about Rs 1,100 crore, it looks to be at least for the short-term. In future, the impact of the softening finish product prices will be more than made up for the expanded capacities which are going on-stream in the next one year.

This company has been a regular dividend payer. In the past, the policy has been to distribute about 15-20% of the profit as dividend. They paid a dividend of 50% in FY10 and given an EPS of close to Rs 100 this year, even assuming a 10% dividend payout, it would lead to a dividend of about 100% which at the current market price gives you dividend yield of about 6.5% to 7%.

I am taking a reverse calculation just to be safe on whether to buy this stock or not. In a normal market, this stock should command a PE multiple of about 5. At the current price of Rs 150-155 the market is assuming that the EPS of the company is going to drop to about Rs 30. From a level of Rs 90-100 EPS, something has to be drastically gone wrong with the company or the economy or the market for the stock to stay at these levels.

In the month of October, promoters have taken 1 crore 35 lakh warrants to be converted at a price of about Rs 300. Out of this, 35 lakh warrants have already been converted in the month of December which shows the confidence of the promoters in the company.

I believe that the fall from Rs 325 to Rs 155 is largely overdone but given the state of the market as of now and the negative sentiment prevailing, I don't rule out the possibility of the stock dropping by another 5-10% from these levels. More or less, however, the stock trading at a PE multiple of just about 1.5 and dividend yield of about 6.5% to 7%, it looks to be a no-brainer at the current market price.

Q: Your next stock pick is Mirc Electronics?

A: This is a company which sells consumer durables under the Onida brand name. They have got manufacturing facilities at Noida, Thane district and two at Roorkee. They are putting up another plant which will be located somewhere in South India.

If you look at their financials, for FY10, sales were about Rs 1,500 crore. Profit after tax was about Rs 18.5 crore. In the first nine months of the current financial year, sales are about Rs 1,350 crore, which is up by 20% of the same period last year. Profit after tax is up by 30% to about Rs 17.5 crore. EPS on an annualised basis is about Rs 1.60 paise and the stock trading at price of about Rs 18-19 is trading at a PE multiple of about 12.

This is a business where there is a lot of competition, not just from the Korean players but also from Chinese companies. Given the brands strength and the fact that they have an established distribution network and after service sales network, these are some things which are positive for the company.

The company in the last couple of months has done a number of new product introductions. They have moved away from normal TVs and have started manufacturing LEDs and LCD TVs in India. They are focusing on sales of mobile phones. The sales from mobile phone business are close to about Rs 400 crore right now, which they plan to take it up to about Rs 1,000 crore in the next two years. They have also ventured into manufacturing of LED lights powered by solar panels. This is a product which has good potential, especially, in the rural areas of India.

At a PE multiple of about 12, the stock is neither cheap nor expensive but looking at it from another perspective, the company gave a dividend of about 95 paise in FY10. This is a Rs 1 face value stock. Given the higher profits, the dividend is expected to be higher this year. Assuming a dividend of Rs 1 for the current financial year, the stock at the current price gives a dividend yield of about 5-5.5%.

With expected sales of about Rs 1,800 crore for FY11, at a marketcap of about Rs 265 crore, the stock looks undervalued. When compared with its peer group and also smaller companies, the likes of Symphony Comfort, the stock at Rs 265 crore marketcap looks like an attractive buy.

The management has aggressive targets of sales expansion and they are expecting the sales to go up to about Rs 4,000 crore in the next three years which means a CAGR of close to 30%. At a current marketcap of about Rs 265 crore, current dividend yield of about 5-6%, this is a stock to maybe keep on one's radar and maybe accumulate on every decline.