Market on a roll: Kotak bets on CIL, ONGC, Sterlite

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Market on a roll: Kotak bets on CIL, ONGC, Sterlite

Indian market is rallying with full might gaining 15% alone in 2012. Experts are hopeful that this rally will continue for some more time. So, till it lasts here are some of the best bets of Sanjeev Prasad, ED and co-head of Kotak Institutional Equities.

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Excerpts from Bazaar 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

Indian market is rallying with full might gaining 15% alone in 2012. Experts are hopeful that this rally will continue for some more time. So, till it lasts here are some of the best bets of Sanjeev Prasad, ED and co-head of Kotak Institutional Equities.

He sees some upside in Coal India , ONGC and Sterlite Industries . In an interview to CNBC-TV18, Prasad said global liquidity could propel stocks to be well above fair value. According to him, this is the right time to remain invested given the high liquidity.

Prasad also feels that HUL 's valuation is not cheap even though its December quarter performance was decent. He recommends selling BHEL due to excess capacity build up.

Meanwhile, Prasad is not so hopeful on the Budget. He feels that the government has no option but to raise taxes this time.

Below is the edited transcript of Prasad's interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying video. 

Q: We have come a long way from 4,500 Nifty to 5,400. At this point could you go out and buy stocks or do you think they have all more or less reached fair value?

A: Most of the large caps are pretty much getting to fair valuation. If you look at our 2013 based fair valuation, we don't see a lot of upside in most of BSE 30 or Nifty names. The only place where we see upside is where there are some issue, for example stocks like Coal India or ONGC. We still about have 16% upside in Coal India to have fair value and about 25% upside for ONGC, we have a lot of pricing and policy related issue in that stock. For Sterlite we have about 20% upside. Other than that, we don't see much of an upside in the market.

Coming to the large cap technology names, for example for Infosys our fair value is Rs 3,100 and the stock is at Rs 2,800. For TCS our fair value is Rs 1,250 and the stock is at about Rs 1200, HUL is pretty much near fair value. ITC has some upside, but we still need to wait for the budget. In the auto names, Maruti has moved up a lot- Rs 1,250 is our target price and the stock is there. BHEL and L&T in the infra space are already trading above our fair valuation.

Honestly, it looks like it is a pretty liquidity profit market at this point of time. On a fundamental basis, I wouldn't be chasing the stocks from hereon unless and until one wants to stay invested for a longer period of time. In the short term, keep aside the liquidity factor, but on a bottom up fundamental basis it is not much of an upside for most of the large cap names.

Q: Do you have Manappuram under coverage? It is a billion USD market cap company.  Any thoughts on how investors should react to the fact that the RBI is barring them from accepting deposits?

A: We don't cover the company so I don't have much of a view on the valuations etc. Obviously, the RBI move is a negative and the company will have to look at some other sources of funding for their loan business.

Q: What about HUL, it is down nearly 5% since earnings?

A: It is just a mood of the market. As of now people are willing to take look at more of high beta names and putting more money to work over there. HUL's numbers were quite decent. They were well ahead of our numbers, but the composition of numbers was somewhat disappointing in the sense the company have reducing the ad spends quite significantly and that what is driving the margins to some extent.

Volume growth has been good, but people are assuming that this is more due to the fact that you had low base effect last year and lower ad spends have been contributing to the EBITDA numbers. How sustainable is the strategy is what people are wondering. Also, their valuations are not cheap. We were looking at about Rs 14 EPS for 2013. So, this is a stock which is already about 27-28 times on 2013 numbers. Given the mood in the market, nobody wants to look at defensives anymore. People just want to put more money as many into high beta names as possible. Over the last few weeks that is the trade which has been going on.

Q: Part of you top 5 sell list includes ACC and cement stocks have suddenly started seeing a lot of buying interest. What's the primary concern there?

A: I wouldn't be buying a cement stock at 10 EV/EBITDA. That's what ACC and Ambuja both are trading at., they are more than 10- 10.5 times on 2013 EBITDA. We are actually reasonably I would say optimistic on the pricing numbers. Cement business is a fairly consulate business in India. I wouldn't use there term cartel for getting into trouble with the cement companies, but there is some sort of pricing arrangement which works in the cement business. I am not too sure how sustainable that is. People are quite excited about the fact that some of the cement companies are taken pricing case over the last couple of weeks, based on the fact that Coal India had raised its prices.

Now that Coal India has been forced to roll back some of that price increase, maybe the companies would be in a position to take the price increase and the margins would improve accordingly. Honestly, why should you be paying 10 times EBITDA for a competitive business is beyond me. Most of the global competitive stocks don't trade more than 6 or 7 times mid cycle numbers. Here we are looking at cement company, which is trading more than 10 times on a reasonably decent set of price assumption.

If the government starts looking at some these pricing arrangement amongst different companies a lot more carefully, there is a pretty high risk that cement prices itself would come off. This means their EBITDA numbers come down and EV/EBITDA which is about 10 times will become a lot higher. So, the risk award balance is just not in the favour, so why do you want to get in a stock where you are already paying so much for pretty risky set of assumptions.

Q: What did you make of the new subsidy sharing ration and the fact that some of these upstream companies now have to bear nearly 38%? How does that change equations for you on faces like ONGC and oil India?

A: We will have to wait and see what the final number is like for the full year. I don't think anybody was expecting that 1/3rd arrangement seen for the first half would continue for the full year. Most of the sell side is assuming that the subsidy sharing number for the full year for upstream companies would be north of 40%. The models we are building 45% as of now for the upstream companies, even in that case we get a fairly reasonably high set of numbers for the upstream companies. For example for ONGC as of now we have almost Rs 34 EPS on consolidated basis and loan plus OVLs Rs 6.5 of earnings.

For the first half, ONGC has done about Rs 14.9 EPS. If you take the subsequent numbers which came out just a few days back, ONGC should do about Rs 6.2 EPS in the third quarter. This means it is at about Rs 21 for the first nine months of this year. That is more than the standalone numbers for last year. So, for the first 9 months we have already exceed the fully numbers for last on a stand alone basis. It is very unlikely that ONGC will make a loss in the 4th quarter.

If you assume that this 47% share, which we have seen in the 3rd quarter that continues in the fourth quarter also then ONGC should do about Rs 6 EPS similar to what we have for the 3rd quarter. This means you are looking at somewhere about Rs 27 EPS for the full year for ONGC in a standalone basis. You had about Rs 6 for OVL because OVL has done about Rs 3.2 in the first half, so logically it should be more than Rs 6.5.

You are looking at an EPS of closer to Rs 34. This means that the stock could be Rs 300 plus even if you take a 9 time multiple and it has some investments also. There is lot of news and noise about the subsidy sharing arrangement. Of course 38% is more than 33%, but we have to keep in mind that how does the 38% compared to analysts' expectations. If the full year numbers are 38% then they will see serious upgrades as far as earning numbers of ONGC are concerned.