SP Tulsian View of Market in 2011

December 29, 2010   ·   0 Comments

www.stockssavvy.com  is bullish on fertiliser, sugar and infrastructure sectors

In the sugar space, he is bullish Shree Renuka Sugars and EID Parry in the long term. In the short term, he is betting on Dhampur Sugar and Simbhaoli Sugar. “Going till March we can see an appreciation of about 25% from the current level in both the stocks,” he adds.

In the fertilizer sector, he is bullish on Coromandel International and Gujarat State Fertilisers Company (GSFC).

In the infrastructure pack, Tulsian is positive on GMR Infra, GVK Power, Pipavav Shipyard, L&T, Mundra Port, Adani Enterprises and JP Associates.

He is also bullish on index heavyweight Reliance Industries. He advices to buy the stock with a longer-term horizon.

Below is a verbatim transcript of his interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy. Also watch the accompanying videos.

Q: We have seen a sluggish move or rather a rangebound move for the last one month or so in the markets. Is this a good time to lap up many stocks in your portfolio? From the heavyweights, what would the initial recommendations be for 2011?

A: We have seen a good run up till maybe October end and then post Diwali we have seen the market remaining quite sluggish or maybe I would call it a rangebound. I don’t think that it is a concern. One can treat this as a consolidation phase for the market which is seen very healthy. Probably in next couple of months, we will be having the budget expectations and the positive view maybe returning back coupled with the foreign institutional investor (FII) inflows. So, taking all this into consideration, I don’t think that there is too much fear on the downside for the market. And, taking that view, one can definitely go long on the frontliner stocks.

If I need to take a call on the sector, maybe fertiliser and sugar, both may not be having a very high presence in the frontliner space, but these two sectors are likely to do quite well and they will continue to do well maybe in the next four-six months time.

Third sector, which I will be quite bullish this time, will be infrastructure because we have seen infrastructure sector having not participated in the last maybe year or so. Once we will be having the renewed buying interest coming in, shares having corrected to such a low level, atleast I am quite positive on the infrastructure sector.

Q: Can you get a little more micro as a sector as one buy or within that space, are there some very clear leads and laggards?

A: First, if I need to take a call, let me take those sectors one-by-one with some stock ideas in each space. If I first touch upon the sugar, definitely my choice will go with the Renuka and EID Parry on a very longer horizon, maybe on a period of about 12 months or so. But considering the expectations of the traders or the short-term investors, they look for the relative performance that maybe next three months which is going to outperform. We have seen Karnataka and Tamil Nadu based sugar mills having participated in a rally and Renuka and EID both fall in that category and they have participated in this rally and inspite of that I am positive on both.

But as I said, on a relative performance, I will be now picking some of the stocks from the UP sugar mills, since the UP mills have not participated in these last couple of months. The two stocks, which I will be quite positive, will be Dhampur Sugar and Simbhaoli. So, these are my two picks on a relative basis that maybe going till March we can see an appreciation of about 25% from the current level in both the stocks. Yes, on a longer horizon, if somebody can take a view of about 10-12 months, it could be Renuka and EID Parry.

Similarly, if I touch upon the fertiliser space again, maybe in fertiliser my prime pick would be the Coromandal International because they are the largest player in the complex fertiliser maker. But I have chosen one stock which could be GSFC with a longer horizon of 6-12 months

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Q: My question was more referring to what one could add in their portfolio as a long-term bet from the heavyweights. If you look at few stocks, Reliance Industries is one specific stock, it has underperformed the Sensex by almost about 20-25% YTD and the steep underperformance has been because of issues like the decline in gross refining margins (GRMs), delay in the ramp up of KG-D6 etc. Does the stock look attractive to add on into their portfolio with a one-year horizon?

A: If I want to give a simple answer, I will say yes, one should go ahead and make investment in Reliance Industries. Q3 results, we all know that they are going to see the drop in their gas production which is likely to have impact on the bottom-line and their E&P business is going to show the poor performance. But the improved GRM and the better performance of the petchem segments is going to definitely help them and maybe Q3 results will be able to recover part of the losses which they will be seeing in E&P business. So, maybe from Q3 point of view, you may see some disappointment and share may fall to about Rs 1,030-1,040 levels where it could be seen as a good buy. But yes, with a longer-term horizon, my call is a buy for Reliance Industries.

Q: I suppose when you speak about infrastructure, you are speaking about a different set of stocks, the contractor companies, the road owners, the builders, in that space, who are the stronger elements?

A: When I am referring to the infrastructure companies, definitely I am excluding the capital goods. L&T, BHEL, Crompton Greaves, Thermax, they are all excluded because they can definitely separately get placed into the capital goods category.

Similarly, if I come on the infrastructure, I will also be excluding the pure contracting plays because now we see atleast 30-40 companies which have been operating in that space. I don’t think that there is much attraction left for those companies, because they operate on a profit after tax (PAT) margin of about 6-7%, earnings before interest, taxes, depreciation and amortization (EBITDA) margin of about 10-11% and all are full with their order book of about two-three years time. We can very easily predict the performance which they are expected to post maybe next couple of years with a growth of about 20% on top-line and bottom-line. But the problem with those contracting companies are that they are enjoying very low P/E multiple maybe a P/E multiple of about five-seven. And then there are corporate governance issues also.

So, taking these two sectors away from infrastructure, I will be focusing purely on the large infrastructure space, which maybe owning the huge infrastructure projects. In that case, I may put the company like Mundra Port, having Mundra Port, a very big port, maybe GMR Infra, having Delhi-Hyderabad airport, GVK, having the Bangalore airport and the strong presence in the power space. It could be JP Associates as well because of their subsidiaries like JP Infra and their own presence in the cement and the other infrastructure play, that could fall in that category. L&T can necessarily come in that category. Maybe a company like Pipavav Shipyard which is moving more towards the defense equipment makers and eventually catering to the defense sector whether you talk of Indian Navy, Army or Airforce. So, my view and focus will be on the companies like GMR Infra, GVK Power, Pipavav Shipyard, L&T, Mundra Port, Adani Enterprises, and JP Associates.

These companies, I don’t think they justify the valuations at which they are ruling right now because we have all been talking the concerns of debt and all that. But all those debts are amply bagged by the huge projects, the infrastructure projects which majority of them have gone onstream and they have started contributing to the profitability of the company, but maybe because since the projects have gone onstream recently, they have been seeing larger interest and depreciation burden in the initial year. I am quite positive on these kind of infrastructure stocks which are owning large projects and it is very difficult to get those projects replicated or very strong entry barriers.

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Q: With regards to Oswal Chemicals and Fertilisers Limited and the fact that they are now looking for a joint development of their Chembur plant. One has been waiting for Oswal to use its kitty after selling its fertiliser business for some time now and nothing has happened, would you look at this as a major positive for that stock?

A: I have been taking this call one to one-and-a-half years back. As you said they have sold both their plants to Kribhco and IFFCO and since then they have been sitting on a cash balance of about Rs 1,800 crore against the equity of Rs 250 crore of the company. So, they have been having maybe Rs 60-70 cash per share. But since that money was not deployed properly, obviously the issues of concern on the management and non-clarity on the funds having utilised by the company, but now the clarity seems to be returning back.

The group company, which is holding a large chunk of maybe about 50-60 acres of land at Chembur, can result in good value unlocking. But still the unclarity remains on the terms on what basis the land is going to get developed. I presume that Oswal Chemicals will be investing the amount for development and all the work, but what kind of profit sharing they all will be receiving etc, all these concerns remains. Taking all those concerns into consideration, I think share has rightfully moved to about this Rs 40 levels where one can see the share taking a halt about Rs 40-42 levels unless further clarity comes on the joint development agreement which is likely to get executed within the group company.

Q: Have you taken a look at BF Utilities story because a lot of institutional investors are evincing interest in the Nandi Infra project? Do you think the run up has been too high or do you expect some more of an upside?

A: If you see this company, at Rs 900, the market cap of the company turns out to about Rs 3,500 crore, still there is non clarity, dispute going on in respect to land holding etc. If somebody can take a positive call, I am not saying I am negative on BF Utilities, but I don’t see value in the stock beyond Rs 900-950 because you can’t justify your valuations of more than Rs 4,000 crore marketcap.

If you are purely going on the infrastructure and the land holding, which they will be having in that corridor which is connecting to the Bangalore airport, I think the same story lies with so many other companies as well, whether you talk of seaport or the airport companies. So, maybe this story is going to get spread to the other infrastructure stocks. But specifically on BF Utilities, I don’t see any value beyond Rs 950 purely on fundamental basis. Technical factors can keep the shares trading with high volatility moving closer to Rs 1,000 then maybe correcting back to about Rs 900. But on a pure fundamental basis, I won’t attribute a value beyond Rs 950.

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Q: There is a fresh salvo of bad news if you please for the real estate stocks. The NHB has gone down the path of the Reserve Bank and has warned the housing finance companies from dealing with middle men, there have been some provisioning norms attached to teaser loans and stuff like that which is likely to impact real estate companies in several ways. Is there any relief at all for these stocks?

A: What you have said of the NHB move is definitely a concern. But I don’t think that there is any silver lining or any hopes. The kind of fall, which we have been seeing from all the pockets, whether you talk of the Mumbai city or maybe across the tier I cities, especially in NCR region and all that and infact lately we have started hearing that in central part of Mumbai the developers or the builders have started offering or brokerage of as high as 4% to the brokers for selling the premises.

So, if that is a situation, definitely there is likely to be slowdown on the sales of the premises, which will ultimately be leading to the mismatch in the cash flow. Once that happens, they may not be able to maintain the growth momentum or the completion schedule, which they have given, which ultimately will be reflecting in the working of the next two quarters or so. So, taking all this into consideration, I don’t think that one can be very negative, but there is no reason for being positive on these stocks atleast in the near-term.

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Q: Couple of stocks, I don’t know how closely you look at these stocks, but they have obviously been up and about in the past few days, Praj Industries, Kingfisher Airlines has had a good run for sometime now and ABG Shipyard. Any of these stocks that you watch very closely in terms of financials and where you would want to take a stand?

A: ABG Shipyard, there is news that they are trying to foray into the defense. ABG Shipyard or maybe the other shipyard companies are taking cues from the company that it is lucrative to move into the defense sector and that is the only trigger for ABG Shipyard for the time being. Otherwise, also if you see on the value basis, maybe this has been showing a lot of volatility, earlier it has moved close to about Rs 500. But I think this is likely to remain a trading stock within a range of Rs 390 to Rs 415-420.

Coming on the Kingfisher Airlines, again the rising oil prices, rising ATF is a concern for all the airline stocks. Since Jet and other stocks have also corrected, in the short-term or in the near-term, I will be keeping my negative view.

On Praj, I am not too enthused because even if you go by the business model, I don’t think that there is likely to be too much demand coming in from the sugar sector for the distillery or other kind of capital investments on a short-term or on the near-term basis.

Q: SAIL has seen a significant amount of a correction off late and there are talks that perhaps the follow-on public offer (FPO) price maybe lower when we spoke with the management, they indicated that it will be in February, the FPO finally. How should an investor approach the stock now?

A: We will be seeing the FPO price band fixed maybe 5% lower and on top of it 5% discount will be given by the retail investors. If you see the performance, having shown by Power Grid and Shipping Corporation, there has been a lot of disappointment from Shipping Corporation. In Power Grid people have made money. So, maybe the same view is being taken for this stock. Because of that fear, share is correcting, maybe the price band could get fixed at about Rs 150-160. If you see the 5% discount coming on that that will be a better way of acquiring the stock rather than going for the secondary market.

Q: Would you have a view on Patni at all? That stock after asking for a rebid or for higher prices from those who are interested in buying out the promoters and General Atlantic stake, has suddenly started slipping today, 5.5-6% lower in early trades. Do you look at that stock very closely at all?

A: Definitely there is value because on a fundamental basis, the stake sell is going to happen at more than Rs 500. But we all see these micro short-term positions, technical positions, which cannot take a very long call and the moment you have this kind of newsflow that the rebid is done or all sort of things, you see the long positions getting liquidated. But all the lower levels, maybe if the share falls to about Rs 450 that makes a very good entry point for the stock.

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Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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