IIFL's dark horses: Bullish on Amara Raja, Bajaj Elct

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Amara Raja Batt BSE | NSE 30/05/12 Are Mutual Funds betting on Amara Raja Batt? Other Stocks in this news Bajaj Electricals | Emami | HT Media | Bajaj Finance |

While stocks like Amara Raja has already given about 21% returns over last three months and Bajaj Electricals has been a slower performer post October, Santanu Chakrabarti of IIFL maintains a bullish outlook on them. "The rally in Amara Raja is not yet over and I expect Bajaj Electricals to outperform significantly," he says.

Below is a transcript of Santanu Chakrabarti's exclusive interview with CNBC-TV18. Also watch the accompanying video.

Q: Would you still stay bullish on Amara Raja, which has already given about 21% returns over last three months?

A: Yes, I would stay bullish on Amara Raja. The main reasons being the discount with respect to Exide still persists. We believe that Exide is a clear leader in the market, in terms of the automotive space. Amara Raja is going through a paradigm shift where in the earnings of this company is going to be lot less volatile, going forward because from essentially being a industrial battery player it is making a successful transition into becoming a automotive battery player which is a much more consumer driven category. Hence, margins should remain high.

There are some near term concerns which were there because of lead price increases but with some of the nonferrous metal prices easing off, you could see some benefit on that count as well. Hence, I don't think that the rally in Amara Raja is anywhere close to being over and we have retained a bullish stance on the stock.

Also read: Why Angel Broing is bullish on Maruti Suzuki, ONGC in long-term?

Q: Bajaj Electricals had its hay day up until October, after which it has been a bit of a slower performer, would you still say it is one of your top picks?

A: There is one part to the business which is essentially the appliances business, which is a consumer category that is growing at almost 20% plus volume growth and 26-27% sort of value growth and delivers kind of RoC which is like 35-40%. However, there is another part of the business which is essentially engineering, construction and setting up of towers and those stocks are what the market has been a little worried about. It is a guzzler of capital because it has about 240-250 days of receivables. People were worried whether the right utilization was taking place of capital in this company. The capital is flowing to the most productive intended use.

The management has made it clear that they have set a ceiling of about 30% for this other side of the business and if that is adhered to, it will be a key value driver and would lead to serious value unlocking in the stock. In terms of pure valuations, the engineering and construction piece of the business and you value that at about 6 or 7 times as you fancy then you will see that even the consumer businesses today are available at 14 to 15 times. Therefore, on a sum of parts argument it holds true and I would be bullish on the stock.

Amongst the list of stocks that we have put out we will see that there has been some divergence in performance and this is perhaps the only consumer stock which has not outperformed significantly and I expect it to do so going forward.

Q: The best performing stock out of your basket has been Emami , about 26% returns over last three months, what the story here and do you see some more upside in this particular stock?

A: Emami upside levers are going to come from two major sources - firstly volume growth. The core categories of Emami like cooling hair oils have been growing at about 24-25% in the last quarter as well. Talcum powder is a relatively newer category and has grown at almost 90%. The only reason that Emami's margins were down in the last quarter was due to employee expenses as well as other expenses. As far as the growth story panning out, there are no worries at all.

The fact that this company has taken a prudent decision of not cutting ad spends in the last quarter even though there were some cost pressures, is the other source for the upside leverage. These decisions make us confident that the management is very focused on growth. If you look at the valuations of some of the consumer stocks which are trading, essentially could be more mature categories definitely perhaps more defensible categories. If you look at the valuations of Nestle or a smaller stock that perhaps has a higher growth potential over the next 4-5 years, then there is no reason why it can't re-rate upwards from 24. The valuations are not cheap but they aren't for any of the consumer stocks.

Q: HT Media is a pick that has already yielded. What is the upside now left in the stock?

A: Pulp prices are a headwind but I don't expect them to go back to the kind of levels that they did in the last cycle. Hence, there is some degree of comfort and secondly, the fact is that there is now much more increased visibility in the key driver of the stock valuations, which is essentially what it does in the Bombay business because Delhi is a settled business. The Delta in valuations does not come from there. Therefore, by next year Bombay losses could be down to as low as Rs 10 crore and break even by the end of next financial year.

The kind of inflection point has been reached in the circulation numbers of HT wherein you are going to see much more delta on ad spends because from being a 20% sort of circulation to 30% circulation, it moves the needle on advertising revenues much more than that much of percentage.

Q: Bajaj Finance because has underperformed from the time you recommended that stock, what's the story here and what kind of price targets are you working with?

A: The financials valuations have seen some headwinds in the last two months or so and a number of them have underperformed. There is need to recognize that Bajaj Finance is clearly a cyclical stock but then the other thing that I would like to state is that it is probably a business which is growing its loan book at close to 80% and its trading at 1.4 times. It makes healthy RoEs. The NPAs are in much better shape than they were two years back and in the consumer durable financing segment have a value proposition that is pretty unique.

Valuation has been recognized by the market yet. Therefore, in terms of undiscovered potential amongst the stocks that I have put out perhaps Bajaj Finance would rate the highest. There are headwinds like interest rates and if the market goes through a downturn in terms of the consumption cycle as well the stock would be hit however, most of those concerns are kind of factored into the price right now.

(Disclosures: I don't own any of the mentioned stocks)