Ex-bonus, RIL will see correction: SP Tulsian

Published on Wed, Nov 25, 2009 at 10:28 | Updated at Wed, Nov 25, 2009 at 14:54 | Source : CNBC-TV18

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In an exclusive interview with CNBC-TV18, SP Tulsian of sptulsian.com, spoke about Reliance's bonus issue that will be done tomorrow. He also gave his outlook on some upcoming IPOs as well as the markets.

He expects correction in Reliance Industries’ stocks post bonus. “If one has a growth visibility for one year which is capable of giving a return of 15%, there will be a lot of tax planning kind of buying seen. So I am expecting on ex-bonus basis we see selling coming in the counter,” he said.

Below is a verbatim transcript of the exclusive interview with SP Tulsian on CNBC-TV18. Also watch the accompanying video.
Q: Reliance will go ex-bonus tomorrow do you expect strength in that counter? Are there any opportunities for traders or high networth individuals (HNIs)?
A: I am expecting correction post bonus because generally people go for tax planning also. In case of the frontline stocks like Reliance Industries (RIL), they have a very good comfort because the bonus portion can be retained by the investors, those who are going for tax planning for next one year.
If one has a growth visibility for one year which is capable of giving a return of 15%, there will be a lot of tax planning kind of buying seen. So I am expecting on ex-bonus basis we see selling coming in the counter.
On the second point, the overseas acquisition share seem to have already risen and ruling at its high. Maybe more than Rs 2,200 could be its top level and on the bottom side, below Rs 1,950 we see renewed buying interest coming in. So the stock right now on cum-bonus basis also is ruling at its upper band. Thus, one needs to be a bit cautious on ex-bonus basis.

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Q: Have you taken a look at Astec LifeSciences which is listing today? Do you think it will come under premium on listing or a discount?

A: On a fundamental basis, no premium is expected but yes if the operator comes into the play, you can see the price going even Rs 150–200. The issue of the company is not that bad but it does not deserve a valuation of more than Rs 65–70 while the company has made an issue at Rs 82. We all know that issue has just managed qualified institutional buyer (QIB) and high networth individual (HNI) category have the investors in single digit. Maybe in HNI category you have eleven investors, and in QIB you have five–six investors. So we know the fate of these kind of issues––they get cornered by the so called operator or by the informed circle and then we see share prices ramping up. We have seen that happen to Thinksoft which has not been able to mobilize at Rs 110 or Rs 115 but now ruling at Rs 300. So if you have that kind of momentum play, it can go anywhere but on fundamental basis, it does not deserve a valuation of more than Rs 65–70 on the secondary market.

Q: Have you had a chance to study the financials or potential of Reliance’s acquisition because now indications are the purchase price may actually inch upto USD 17–18 billion? Is that still a valuable acquisition for Reliance?

A: It maybe very difficult for an independent analyst sitting here to take a valuation call so correctly. However, if I give a ballpark figure, I don’t think that anything beyond USD 15 billion because even the indications from the close quarters have been that this is going to be the largest acquisition by an Indian company. So if we go by that statement, previous acquisition has been of Corus at USD 12.2 billion. So I don’t think that it should go beyond USD 12.5–13 billion. Even if it exceeds USD 15 billion, this is going to be quite expensive because we all know at EBITDA level, company has an earning of about USD 2.5 billion, on the net level it has huge losses.

I agree that topline has been very respectable at more than USD 51 billion, but I don’t think that paying more than USD 15 billion could be easy. All along we have been reading the intention of the company that they are not too keen for going for the debt and more banking on the treasury stocks, which could be a source of finance. So I don’t think that beyond USD 13–14 billion any analyst will be too happy or comfortable with this acquisition.

Q: Any thoughts on DEN’s listing yesterday?

A: I don’t think that this concept has percolated well with the analysts or maybe the investors. I agree that Rs 195 seems to be the fully priced level or could be at about Rs 190; however, I don’t think that it deserves a listing of or the price ruling at around Rs 155–160. It should catch on anywhere between Rs 175–190 in next week or so once the selling pressure tapers off because one needs to strictly compare the company with WWIL. Since this company has been able to hold a topline of more than Rs 750 crore on a consolidated basis with bottomline just marginally at or in black, it gives a lot of comfort when comparing with the WWIL. So if somebody has the courage and vision because we have all been talking of two–three years’ view on other IPOs, which went public recently but if somebody can take a call for three-six months on the stock, he can reasonably expect a 20% return if he acquires the stock. I don’t know what was yesterday’s closing but even at Rs 165–160 should make a good buy with a three–six months’ view.

Q: It seems today there will be a change in legislation for sugarcane pricing, what do you think might be the compromise worked out and how do you think the sugar stocks will react to it?

A: Normalcy is returning back in Uttar Pradesh (UP). We have seen about 9-10 mills that have started crushing in the last twenty-four hours in the central part of UP. Generally, western UP starts crushing first but mills having started crushing in the central part. One of the mills belongs to Bajaj Hindustan, one to Simbhaoli and one Dhampur. I think maybe in the next five days crushing will commence in all the mills in Western and Central part of UP with Eastern UP to begin the process last.

At present, they are procuring sugarcane by paying a price of Rs 200 and mentioning on that slip that whatever price is agreed will be paid by the mills to the farmers, which has been largely accepted by the farmers. So I think maybe a price of Rs 200–210 per quintal should be the price which should satisfy both the parties.

Moreover, the mills are expecting a good recovery also due to the late crushing. The sucrose content in the sugarcane improved and the expectation of the recovery is at about 10% which is likely to go up to 11%. So looking to this kind of recovery and if you have a price of Rs 210 also, I don’t think that miller should really have any complaint happening on that front and state advised price (SAP) will continue to be the power of the state government to fix. Mills will be paying the total cost of the sugarcane to the farmers, there will be no burden on the exchequer either on the state level or at the centre level.

Q: Are you impressed with what you heard on DEN Networks? Do you think that the stock can trade at higher levels or is this looking like it is going the Thinksoft way?

A: You cannot make out whether this stock will go on the lines of Thinksoft because we can only see that once you allow two days to pass on and maybe from Monday onwards, you will get that indication. But yes, coming on the performance as indicated by the management the disappointment is that you are not going to see anything upto FY11 because they are expecting to start contribution from new projects in Q3 of FY11.

So generally you have any kind of delay happening which is most likely. You have missed FY11, so you only will be having all the contribution from FY12 and the biggest concern for the company will be its high equity base. So I don’t think that it will excite the market too much at this point of time because even if I go by the EPS of 11–12, it is ruling at a P/E multiple of 8–9 and you have many companies available in the space at that kind of multiple which is ruling at present at about 6–7. So I am not concluding right now that this stock will go on the lines of Thinksoft but I maintain my view on the valuation purely on a fundamental basis.

Q: The other one that has been active is GMDC, do you track it?

A: Yes, I do track it but this has been languishing. In fact, all the Gujarat stocks have been languishing because of 30% profit sharing directive that came from the government. However, that seems to be fizzling out and we have been seeing the renewed interest on the company those who are holding the mining rights and GMDC is one of the pioneers in that area. The pure valuation call is happening on that front.

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