Have sugar stocks bottomed out? SP Tulsian answers

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Q: One hears pretty disturbing reports about this IPO market again, how calls are being made from Ahmedabad, certain returns are being guaranteed. Is it getting back to the 2006-2007 level yet or it is not quite there?

A: I am surprised to see that even in case of NMDC there has been applications even in Ahmedabad, Jaipur and Bombay market where the applicants were assured of Rs 2100 return on the maximum amount applied by them of Rs 1 lakh. So maybe in majority of cases, as we have talked about Texmo Pipes, in many of the cases it is all the play of operator or the so called the person who has undertook to get the issue subscribed. But in other cases also, one has the feeling that this X operator is playing into this stock because they know that the operation is going to continue for about 15 days on their own they take a risk. This kind of trend has again caught on because I do not think there is any other option before the issuer to make the issue sell through except to resort to all this.

Q: What did you make of Pradip Overseas issue?

A: I am happy with Pradip. I do not know because there has been contradictory report that some of them have said that this issue is not good. But if you see their expected EPS for FY11, it is likely to be about Rs 30 on expanded equity and even for FY10 they will be having an EPS of about Rs 22-23. In fact post restructuring which they have done, in 2007 if you see the company have been paying 33% tax to the extent of anywhere not less than Rs 10 crore in 2007 as high as Rs 20-25 crore in 2009-2010, so with these kind of expected profitability and if you have the consistency in that the PE works out to about 4.

Second point, which I found in so called optically as negative for the company, has been higher working capital finance to the extent of Rs 500 crore. But for a textile exporter or a textile player who is giving credit in the market and if he is able to manage the working capital finance from the banks, as high as 10-11 banks which is backed by the inventory and book debts of about Rs 800-850 crore, I do not think that I will at least be viewing as a leverage balance sheet of the company. In fact that gives them a good benefit because in the textile market cash discount component goes as high as 3%. So you can play on the interest arbitrage, borrow the money from the bank at 1% per month and supply the goods on 2 months credit, 2.5-3% per month and if you have the surety of getting payment back.

So taking all this into consideration, I have been very happy and found to be quite comfort in the issue of Pradip Overseas.