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Bullish on Polyplex, Sterlite Tech: Kimeng Securities

Published on Fri, Feb 18, 2011 at 12:45 | Source : CNBC-TV18

Updated at Fri, Feb 18, 2011 at 20:15

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Jigar Shah, analyst at Kimeng Securities, in an interview with CNBC-TV18, gave valuations and recommendations for Polyplex, Kalpataru Power and Sterlite Technologies based on their third quarter performance.

Below is the verbatim transciprt of the Shah's interview with Mitali Mukherjee and Udayan Mukherjee on CNBC-TV18. Also watch the accompanying video.

Q: You liked Polyplex's numbers. Take us through what was good about them.

A: The Polyplex quarter three numbers have been fantastic. This has been an exceptional year for all the companies in the pet film business. Their earnings have been very strong on the back of rising cash spreads. We expect rises to continue even in quarter four, despite some moderation in the pet film. This year, we expect the recurring earnings per share to be Rs 150 for Polyplex, that makes the stock trade it like 1.6 times price earning ratio.

Even if we take a more normal earning, the stock could trade at 2.5-3 times which is very cheap compared to historical average of 4-5 times. Price to book ratio is 0.5-0.6 times. More notable thing is that the balance sheet has become completely debt free from this quarter. Dividend yield should be around 5%. That makes it very strong 'BUY'.

Our target price is significantly higher, almost 2.5 times from the current stock price level, based on price earnings ratio of 4 times for this year.

Q: Was Kalpataru Power a miss this time for you?

A: Yes, Kalpataru Power earnings were about 15% below our expectation. This was largely caused because of delay in orders by Power Grid which started giving only in Q4. Also partly subdued margins in the civil construction business of JMC. We expect that from Q4 the performance will strengthen significantly. We reiterate the earnings in the next year should have a 28% growth.

The main reason behind this is improvement in order backlog, which is currently at about Rs 100 billion. This is more than two times the current sales, and at about Rs 20 of earnings per share next year. The stock is trading at about 7 times at a price to book of 1.1 times.

With a fairly strong balance sheet and debt equity of about 0.3 times the stock is very attractive. We think that the stock should rerate. Our target price for Kalpataru Power is Rs 187.

Q: And finally Sterlite Technologies, you didn't like those numbers too much either.

A: Yes, we expected some moderation in the profits but it was significantly lower. In fact, the year-on-year (YoY) EPS declines 75%. This is due to some unfavorable product mix, particularly, in the power conductor business, which we feel is reversing.

In Q4 there have been more orders. In FY12 also, orders from Power Grid have been released. This should give a better margin to the company, a more normal margin of what Rs 14,000 per tonne at a gross level. This along with the optic fibre sales, which are anyways doing well, should improve the earnings by 27% for the next year. We feel that the company will come back in the reckoning.

We are not giving any value currently to the three build operate transfer (BOT) power transmissions projects that have been secured by Sterlite Technologies . We feel that even on the basis of the current earnings from the conductors and optic fibre, this stock should trade at Rs 67.

Our valuation is worked out based on discounted cash flow. We also find the company good because the balance sheet is strong and the ROEs are fairly healthy upwards of 20%.