Sandeep Singal of Emkay global talks about the Holcim-Ambuja-ACC deal, individual stocks, banking stocks and F&O contracts.
According to him, Ambuja Cement's market cap was at Rs 35,000 crore. Post the deal, Holcim will take away Rs 3,500 crore, which shaves off 10 percent market cap and the stock is down by that much. However, Holcim has already promised a capex plan of Rs 3,500 crore in Ambuja.
Singal suggests a buy in distress kind of argument. He told CNBC-TV18, they have a base case valuation on Ambuja at around Rs 165 post this event and a worst case valuation of about Rs 145 if the holding company discounts of ACC increases to 50 percent instead of 30 percent.
Below is the verbatim transcript of Sandeep Singal’s interview on CNBC-TV18
Q: What is your view on the Ambuja-ACC deal? The market has given huge thumbs down to Ambuja Cement and minor thumbs down to ACC, how would you approach both these stocks?
A: Ambuja's market cap was about Rs 35,000 crore and the only negative is that they have taken away cash of Rs 3,500 crore, so that clearly shaves off market cap by 10 percent and we are seeing the stock down by that. Now going forward they have 61.5 percent holding in Ambuja vis-à-vis 50 percent holding in ACC and there clearly our view is that they would nurture Ambuja far better over ACC and primarily this comes from their first statement that they are approving a capex plan of Rs 3,500 crore.
So loyal investors might be feeling why they took away this cash but at the same time they have given this cash back in the form of capex. And they would stay invested at a particular price point to reap the benefit of being one of the fantastic cement companies, Ambuja being the best brand.
Q: So this is a buy in distress kind of argument you are using?
A: Yes in fact our base case valuation is about Rs 165 post this event and worst case valuation is about Rs 145 if the holding company discounts of ACC increases to 50 percent instead of 30 percent. So somewhere in this range we would definitely see institutional buying coming in and supporting the stock price.
Q: Hero MotoCorp has done very well post its earnings and the beat on margins, would you buy, do you think there is still more upside?
A: I am really enthused by the statement of the company on two counts, one, they would come out with about 10-12 new models or variants in the second half of this year and that would address one doubt of the market that Hero alone would not be able to come out with new models in variants at the same pace or at all post the divorce of Honda with them.
Second they have said that they would reduce the cost to an extent that it would improve margins by about 400 bps over a period of time. And in engineering span this kind of post deduction programs are doable because there are a lot of inefficiencies where you will really scrutinize the processes and once you streamline them it is possible. So once they do that it would be a huge cost advantage vis-à-vis competition and as it is two-wheeler stocks are being preferred to four-wheelers. So definitely thumps up by the market to this commentary and results.
I would be positive in this stock and continue to remain bought in Hero Moto. This is one of our preferred pick also. Typically Hero being present in rural market where we see larger spending as compared to urban markets and also on the point of view of election you will see some spending in rural markets over urban markets. So it is our favourite and we are staying invested in it.
Q: Have you looked at the banking stocks, especially Yes Bank closely of late? Is Yes Bank a buy?
A: Our analyst has downgraded the earnings in view that they are not able to raise capital and they are not willing to raise capital at this price point. Second on the back of their reliance on short-term loan from market more than deposit so he has reduced its earnings by about 15 percent. Stock has already been discounted but given the overall banking space when I have a choice of HDFC Bank with me, our most preferred pick within the private banking space is HDFC Bank and that would remain inspite of Yes Bank correcting. So we will still prefer HDFC Bank.
Q: How is the July contract panning out for you, it did look 48 hours back that 6000 would be an easy target, 6100 was seeing a lot of put writing but so much has been shed and so much of developments have come, how might this contract pan out and what are the early signals you are getting for the August contract?
A: My worry is consistent rise in forward premium and what I read is that over a period of 10-15 days it has risen from about 6.8 percent to about 10.04 percent, which is about 300 bps kind of one year contract. So about 8-10 bps increase in cost of funding of most of the derivatives contract supporters. They are typically MNC bank treasuries and I don't see cost of carrying going up by that and anyone who is holding long position is not really willing to pay that.
So in this kind of scenario I see some VWAP selling coming but if I were to say stock specific an opportunity for all the viewers of this channel could be, look at Jaiprakash Power Ventures, the stock is at about Rs 14 and it has been consistently sold after the Uttarakhand issue and one of the plants getting damaged.
But our analyst clearly says that in their PTA agreement they have provisions for measures to invest more capital and they would get return on that and also their two plants are getting on stream. So net-net at Rs 14-15 price there is extreme margin of safety built into the stock and we could play this stock for about Rs 22-23 kind of price target.
We were selling in this counter because the short rollover has put fresh arbitrage, might not be able to roll because cost of carry is pretty less. So if you get a chance because liquidity would be huge, it would be an opportunity to buy a good chunk of this stock during WAP. But mostly I see this expiry sailing smoothly, I don't see fire crackers as far as the index is concerned. But stock wise yes in Ambuja or Hindustan Unilever, JP Venture, Hindustan Petroleum Corporation (HPCL) there could be a lot of volatility on account of VAP buying selling.