Don't buy infra; wait for correction: KR Choksey Sec

The budget day is looming and the government had announced its economic survey today. Commenting on infrastructure stocks that have gained quite substantially in anticipation of sops in the budget, Deven Choksey of KR Choksey Securities said that projects take time to fructify and balance sheets to get build-up and so he recommended waiting for some correction before buying the stocks.

On the fuel price hike, Choksey said that the price hike would be beneficial to both GAIL and ONGC going further.

Here is a verbatim transcript of the exclusive interview with Deven Choksey on CNBC-TV18. Also watch the accompanying video.

Q: You track the oil space quite carefully. What would be the impact on ONGC and GAIL?

A: The entire mood is quite positive. It is very clear that the kind of subsidy burden on the upstream companies is going to be fractional.

This burden should be somewhere around Rs 5,000 crore. That too, if one has to look at – if one is removing out the non -auto fuel subsidy burden, and keeping only the auto-fuel subsidy burden even after impacting the price hike, I think this amount is turning out to be less than Rs 5,000 crore, which was again Rs 55,000 crore last year. So, from that point, I think it is a significantly less amount.

One thing that I am not very clear about and I think I would like to seek further clarity on is whether the government would have some amount of shares that they did have last time of 70:30 ratio, within the auto-fuel subsidy.

If they would have that then I think this particular move is going to be extremely beneficial to both companies ONGC and GAIL. More particularly to GAIL because I think the full burden would go away because of this particular move. But once that clarification comes in, I think my viewpoint is that one has to translate this particular impact on to the EPS, without factoring into account that the government would do away with the 70:30 ratio that they employed last time, then I think this impact on ONGC would be somewhere around Rs 13-14 per share. On GAIL India, this particular impact could be even higher. I think it could be somewhere around Rs 3-4 per share as far as earnings are concerned.

Based on last year’s figures on which I have calculated this particular amount, taking oil at USD 70 per barrel for the current year and worked out this subsidy amount, I find that it is going to be beneficial to both these companies going forward.

Q: Why is the market responding positively to a USD 600 million issue from Tata Steel?

A: Earlier the talk was that company would end up raising around 4,500 to 5,000 crore as against which the company is now raising only 3,000 crore. So that conveys two-three things; one, the domestic market operation is definitely going to contribute significantly to the cash flow position of the company and the second thing is that the Corus operation itself should be generating better amount of capacity utilisation going forward in this particular calendar year. So from that point of view it’s encouraging news if the company has factored these two aspects into account. The particular move looks very convincing.  If we are probably going to come out of the problem particularly in the steel space all the more important is some of the companies like Tata Steel would start giving some amount of stability to share prices as well. Valuation wise the stock probably has a capacity to go up further if the Corus factor is giving a positive signal going forward.

Q: One word on some of the infrastructure stocks and whether you are still looking for buying over there or you are avoiding this for a bit after the sharp run-up?

A: There is nothing to avoid per se but these stocks have run-up quite sharply and no doubt in budget the outline is going to be made as far as infrastructure investment is concerned. But we always understand one thing very clearly that these particular projects do take time to fructify and at lest balance sheet to get build-up, it definitely takes time. We do like some of the infrastructure stocks even within that space some of the capital goods companies also we do like who are the biggest beneficiaries going forward. But I would like to say don’t chase them it’s better to wait for some amount of correction.