Bullish on IVRCL Infra, HDIL, Mphasis: Angel Stock Broking

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Bullish on IVRCL Infra, HDIL, Mphasis: Angel Stock Broking

Lalit Thakkar, Angel Stock Broking is bullish on IVRCL Infrastructure, Housing Development and Infrastructure (HDIL), Alembic, Greenply Industries, Mphasis and Electrosteel Castings.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show »

Lalit Thakkar, Angel Stock Broking is bullish on IVRCL Infrastructure , Housing Development and Infrastructure (HDIL), Alembic , Greenply Industries , Mphasis and Electrosteel Castings .

Below is a verbatim transcript of his exclusive interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: You are bullish on construction. That space has got battered over the last couple of weeks. Why would you be buying things like Nagarjuna and IVRCL?

A: Market has always reacted in extreme for the infrastructure companies. In 2008, even though these companies price competitive business had low return on equity (RoE), on account of growth, these companies were trading at a price to book value of around two-and-a-half to three times.

Now what has happened because the RoE has come down, these companies are trading at half the book value. The growth rate of the industry is going to be around 15-16%. When an industry is growing by 15-16% per annum, any entrepreneur can get a 15% RoE also. So, what we feel that if the RoEs are right now 10%, it's a matter of time this RoE will improve from 10% to 15%.

Coming to stock like IVRCL, this company has invested substantially in the build operate transfer (BoT) projects. We feel that it's a matter of time that this company will start making profit on the BoT projects also. In the case of IVRCL, the promoter stake is around 10%. So, because of the high floating stock, the stock has corrected significantly vis-à-vis the peers. Because of all these reasons, we like infrastructure sector and specially IVRCL.

Q: The sector that's probably fallen as hard, if not worse, is real estate. From there, you like and are recommending HDIL.

A: In the case of real estate, we are seeing that the prices of the real estate stocks have come back to 2008 level, but the fundamental of the companies are not as bad as it was in 2008. What has happened in the last three years is that many of the companies have reduced their debt and increased their net worth. So, on a price to book criteria, earlier they were trading at one-and-a-half to two times, now some of the real estate companies are trading at half the book value.

Also, what I feel is that this real estate industry is a huge industry. I think it contributes around 7-8% of the gross domestic product (GDP). If you look at the contribution of the listed companies, it is hardly anything to talk about. So, these companies, in some years, they are not going to do well, but in some years, they are going to do very well, where they will be able to dilute, infuse and grow. Markets cycles are ahead of the business cycles, so even if real estate industry doesn't do well for couple of quarters, there is a possibility that the stocks might move up. Finally, when the interest rates start coming down, the stocks will move ahead of the time.

Q: In midcap pharmaceuticals, you have picked Alembic, why do you have a target price of Rs 92 there?

A: Alembic Pharma, the management is on a redemption path. The current focus of the management is to be completely transparent, work professionally, at the same time look after the interest of the minority shareholders. On account of that, the company has announced a demerger where it is going to unlock its land valuation.

Post demerger, what I gather is that the company's market cap will be around Rs 600-700 crore. This is not a small pharma company, the turnover of the company is going to be around Rs 1,400-1,500 crore. Its earnings before interest, taxes, depreciation and amortization (EBITDA) margins have improved dramatically from 9% to 16-17% and this kind of EBITDA margins in pharma business are sustainable. If you compare this stock valuations in terms of PE or in terms of EV to sales vis-à-vis the midcap stocks, this company is trading around 0.6 EV to sales on FY12, while other midcap pharma companies are trading at 1.2-1.3 EV to sales. So, that's the reason we have 30-40% upside on the stock.