In an interview to CNBC-TV18 SP Tulsian of sptulsian.com shares why he prefers Apollo Hospitals to Fortis Healthcare.
He also shares why he does not expect any improvement in performance of Jubilant Foodworks for at least another three to four quarters.
Among other things he gives his outlook on sector-specific picks like telecom, textile and logistics companies.
Below is the transcript of SP Tulsian’s interview to Latha Venkatesh and Prashant Nair on CNBC-TV18.
Latha: Is Fortis Healthcare a stock you worry about at all, though of course, I am equally interested in knowing your view on Endurance Technologies at current prices.
A: If you take a call on the Religare and maybe Fortis Group, when the group goes into the mess, you see these kind of restructuring, adjustments and everything happening, assets monetisation, hiving off. So, I have never been comfortable with these kind of things as a shareholder. That may be good for the creditors of the company or of the organisation. So when the Fortis things has happened, at that time also I had given my opinion that I have never been comfortable and always my preference has gone with the Apollo Hospital. And coming now, straightaway on the Endurance, in the morning I spoke and I expected the listing to happen at around Rs 575. But now, the share is ruling at around Rs 645. Again, I have the same view. If you see the Q1 numbers and if you extrapolate, or maybe taking cues from the last two completed financials, there has been a single digit growth on the topline, maybe lower teen growth in the bottomline of about 11-12 percent.
So, if I extrapolate the same thing about Rs 24 earnings per share (EPS) can be seen maximum for FY17 and the share is now ruling at a price earnings ratio (P/E) multiple of Rs 27. Endurance is not like Advanced Enzyme where they are sole players. You do not have any comparable available. In auto ancillaries, you have at least 50 stocks available amongst the listed space, or maybe if I go by the comparable peers also, I am not saying the stock will not go up, but if you buy a stock at such an expensive valuation, and I am not talking in the absolute number of Rs 645 with a P/E multiple of 27, I do not have that comfort because as I said, you have 50 stocks available in the auto ancillary space. If you want to go with the comparable peer maybe like aluminium dicasting, you have Ricoh Auto, you have Talbros Automotive Components.
But apart from that, I do not think that as an investor will be too concerned if you have the growing auto ancillary available, that too with a lower market cap. Here the market cap is also seen to be quite high at Rs 8,000 crore. So, you see a very limited upside. Maybe your portfolio will look very rich that you are holding the high value stocks. But maybe on a relative basis, I have many other auto ancillary ideas which are available at much lower valuations.
Latha: I wanted to ask you about Jubilant. After getting beaten down to a pulp, probably coinciding with the resignation of Ajay Kaul, the stock has been moving up. Today, another 4 percent higher. Buyable?
A: On the day of resignation of Ajay Kaul, the whole market was taking it as negative, and I have said that in fact, this should be seen as a positive, because if a company is showing a declining trend, I do not know why the market has so much fancy for any particular CEO who has been showing a declining growth in terms of the margins or maybe in terms of an absolute bottomline and on that day, I have said that the stock is, if you want to, I will not be taking a fundamental call on the stock, because naturally, if the conscious decision of ousting the CEO has been taken by the management after 4-6 years of seeing the falling performance, definitely that should be seen as a good decision. So, on that day I have said yes, this is a positive move and if you want to have a short-term view, I have never, still if you want to take a fundamental call, I do not think that the growth can really be expected from the company’s performance at least for the next three or four quarters. So, maybe that will not cheer the market once the results come out at a regular interval. But the buying call given on that day has worked and now at the current price, I will not be taking a renewed buy call on the stock.
Latha: Anything with the textile stocks today? Garden Silk Mills for instance is buzzing as are a few other stocks. Do you like anything in textiles?
A: In fact, I will remain away from all the textile stocks and more specially, the cotton one, those who have been having the cotton textiles, I am not so much worried for the polyester or the man made textiles where the things are used because the cotton prices have been seen going up, there is very lower offtake when you talk to the people. So, I will not be taking any fresh call and if you really see the prices of all the textile stocks, they have all been ruling practically at its all time high. Garden Silk may be one of the case where the things are seen moving up which we see sporadically happening in this stock maybe twice in a year kind of things. But I will not be taking a buying call on any textile stocks.
Prashant: Come in on idea, if you will. The stock is up 4 percent. My colleague Nisha reported some time back that Idea Cellular would be a potential merger and acquisition (M&A) candidate. If that were to happen and from a four player market, this becomes a three player market, what are your thoughts on something like an idea? It is trading at about Rs 74-75 right now.
A: Maybe two decades back it was 40 players market, shrunk to 10, then to five and now to three. So, it is very easy to count them on the fingers, the wicket of Reliance Communication is gone with Reliance Jio merging. Obviously, you do not expect that to happen with Bharti. You do not expect that to happen with Reliance Jio which will be seeing the light of day from January 1 on a commercial scale, now on trial. So, definitely they are there to survive. And third one is again Vodafone being the multinational corporation (MNC). So, it is very easy to understand that if it is a three player market, then who is the fourth one who will go because already we have seen Aircel and RComm getting merged and then RComm saying that vitual merger with Reliance Jio has happened.
So in fact you have seen that already twin casualty having taken place in the last three or six months. So, obviously, this is very obvious. But one thing which really bothers me, when we talk on the non-performing asset (NPA) issues and all that, when the things are really flying very high, promoters really start going gung ho. See the kind of performance of the Idea. We have already seen 80 percent fall in the Q1 numbers on the FY16, if you take average or if you take on a year-on-year (Y-o-Y) basis, it is very much obvious that group will not be able to sustain, group will not be able to pump in the money.
Prashant: Sorry 80 percent fall in what?
A: Q1 bottomline on a Y-o-Y basis. So, if you take the situation things are really looking very ugly for all these telecom stocks. Huge capital expenditure (Capex), shrinking margin, so even if that happens, though the management has denied that there is any kind of talks happening, but the street is very much expecting that to happen between Vodafone and Idea because you do not expect Reliance Jio will not hunt for any acquisition, Bharti will not hunt for any acquisition. So, I am keeping a negative stance on Idea that in fact, my negative call has been there from Rs 110, maybe prior to the Q1 numbers having announced by the company. Since then I have been saying that Idea is looking the weakest amongst the lot. So, still I keep my same weak or negative view on the stock as well.
Latha: In the mood of goods and services tax (GST), logistics stocks again doing well. Which one do you like?
A: Maybe these two or three stocks, one is Allcargo, that is a very fundamentally sound company. Second could be Gati and third could be Shreyas Shipping and if you want me to add fourth one, I will go with Oricon Enterprise because they also have a logistics division along with the plastic packaging which is also doing quite well. So, these four stocks Allcargo, Gati, Shreyas Shipping and Oricon Enterprise.
Latha: Could you access the Hindustan Zinc numbers? Any thoughts?
A: Excellent numbers and firstly, let me tell you that there is no inventory gain because there is increase in the inventory of about Rs 66 crore. If you see, the true pricing power is seen reflecting into this working of the zinc and lead, both just to simplify the whole results, if you see, because firstly there is no point in taking a Y-o-Y call. Now if you take a quarter-on-quarter (Q-o-Q) call, there is an increase of Rs 915 crore in the realisation of zinc and lead, both put together and there is an increase in the EBIT of this zinc and lead by Rs 832 crore. So, that means your cost of production are remaining constant. Whatever extra realisation have straightaway got added to the operating profit and this is what we have seen in the operating profit numbers also.
So, if you see the Rs 4.50 EPS having posted by the company for Q2 can easily get extrapolated and as regards Nigel’s point from open cast to underground, that is going to add further to the profitability of the company going forward because that is expected to start happening now from Q3 onwards and I will not be surprised to see an addition of Rs 1 on that account also. That means about Rs 11 EPS can be expected in the second half which was at about Rs 6.50 in the first half. So, overall, it is a beat overall on the performance for which the pricing power of zinc and lead has seen straightaway contributing to the profitability as I said to the extent of about Rs 850 crore.
(Disclosure: Reliance Jio is part of Reliance Industries which owns Network18 Media and moneycontrol.com)