According to Sanjay Vaid, Sr. Vice President and Co-Head of Equities at SBI Capital, both IVRCL and NTPC are stocks which will see good gains, but only after going through a rough two quarters.
Going forward, Vaid thinks that the stock may see another 8-10% rally, but anything above that will take at least two quarters.
Talking about NTPC, Vaid believes that this stock will face resistance around Rs 175 levels going forward. "However, if it breaks that level, it can go up to Rs 204-205" he said. Vaid advices investors to enter this stock only if they have a long term investment in mind.
Below is an edited transcript of his interview with Latha Venkatesh and Sonia Shenoy. Also watch the accompanying video.
Q: Should one accumulate IVRCL at this level or sell?
A: The stock’s performance for the last few quarters has been very dismal and we feel that this pain will continue for at least another two quarters going forward. Although, the stock or the company has a huge order book of USD 210 billion, which is almost a 4 times FY11 sales, they are under pressure because of the high interest rate regime now. The subcontracts are finding it difficult to get credits, plus the credit terms are becoming slightly difficult. Also, because of positive of raw material as well as labour, there could be some concerns on execution going forward.
The price of the stock has corrected hugely and it’s trading at the cheapest valuation amongst its peers. If you look at it on the standalone basis, it is trading at almost 6.5 times. The last one or two days has seen a rally, but I would say it is a short covering and corrective rally. We feel that stock could probably go up by 8-10% from these levels backed by these kinds of rallies. So we could put a target of almost Rs 49.50 or Rs 50 on this stock. Going beyond that would take at least two quarters.
So you can wait for another 8-10% up move and cut your losses. But if you are a longer term player and want to hold it beyond two quarters, then I think we would have to wait for that time.
Q: NTPC has had a roller-coaster ride since the beginning of the year. What would you advice a longer term investor to do with this stock?
A: This stock is one of the better picks in the power sector because of the strong business dynamics. We are expecting the company’s topline to grow by almost 9% this year and the PAT to grow by almost 6%. On the valuation fronts, the stock is trading at almost four year lows of price to book value. It is trading at 1.8 as of now for FY12 and 1.7 for FY 13. So valuation wise, it is a strong pick at these levels.
The only concern here is on the F&O front, where you see large amount of call writings, which has happened at Rs 180 and Rs 190 levels; almost 7-8 lakhs shares outstanding at both these levels. So for the shorter term, or for the expiry of September, there would be some resistance in the stock between Rs 180-190 levels.
Breaking the Rs 175 support was a huge negative for the stock, and that now becomes a strong resistance for the stock. If the stock crosses Rs 175, it could head towards probably Rs 185-190. We feel that stock can easily go and trade towards Rs 204-205, given that you are able to hold it for at least two quarters. But in the shorter run, there could be some resistance at Rs 175 and then at Rs 185 levels.
Q: Like you said, if the stock doesn’t go above Rs 175 then one should be worried. If an investor sees that happen and wants to book his losses and move into another stock, what would you recommend?
A: In case he wants to stay in the same sector, then moving from generation to transmission is a good idea. A stock like Power Grid would be much better, which can easily give him 15-20% upside from the current levels. We have a target of Rs 125 for the stock. So he can easily shift the money from NTPC to Power Grid and remain in the same sector.
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