Sanjeev Prasad sees value in private banks, bearish on L&T

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Sanjeev Prasad sees value in private banks, bearish on L&T

Sanjeev Prasad of Kotak Institutional Equities talks about the stocks that are in news this week. In an interview to CNBC-TV18, Prasad said that L&T will continue to face execution challenges. It beat market expectations on Monday with a 22% jump in third-quarter net profit.

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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

It's a volatile market reacting to the third quarter earnings of companies. While experts feel that session of good earnings is over, the market is getting prepared for the painful ones. However, the Reserve Bank of India's (RBI) credit policy review is likely to give much-expected direction to the market.

Sanjeev Prasad of Kotak Institutional Equities talks about the stocks that are in news this week. In an interview to CNBC-TV18, Prasad said that L&T will continue to face execution challenges. It beat market expectations on Monday with a 22% jump in third-quarter net profit.

Ahead of the credit policy, he sees significant value in private sector banks as asset quality concerns is already priced in.

He is disappointed at RIL 's third quarter performance but the buyback is seen to support the stock. Prasad is expecting Rs 800 per share to be floor on RIL once buyback starts.

Meanwhile, Prasad is hopeful of a rate cut only by April-end or May.

Below is an edited transcript of his intervie with Udayan Mukehrjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: Do you think the pessimism in the L&T stock was overdone on the evidence of what you saw yesterday?

A: I think we have to wait for more data points to really take a call over here. The order book looks okay, but if you look at the final details, we don't get too much of comfort unless the company discloses where the orders are coming from. Of the Rs 170 billion of the order book which it announced in the third quarter, we can account for only about USD 70 billion or so and a large proportion of that is coming from the infrastructure sector where I suspect you could see challenges.

One of the issues facing the stock is the composition of the order book which is changing quite dramatically. The oil and gas order book is gearing towards more of power infrastructure areas where I think there are two issues. One is that margins may not be as high as what we are seeing in the traditional E&C business of L&T and the second and most important thing is execution challenges in these two areas would be quite meaningful. I think the order book will take a longer period of time. So I am not really sure about the translation of all this order book into revenues going forward at the same pace as what we have seen in the past. Clearly it is a very credible achievement in terms of the order book announced and numbers which we had yesterday in terms of the macro environment. But I think we need to wait and see whether this sort of rally is for real on the back of positive news which we are seeing in terms of the order book and the numbers which we have seen yesterday.

Q: What did you make of Sterlite - the other stark reaction the market had yesterday?

A: The numbers reported are pretty much in line with what we were anticipating. But again the big challenge over there has nothing really to do with their current operation. It's more to do with what is happening in Vedanta Ltd. and how quickly the problems over there get resolved. Clearly, Vedanta Aluminum is going to make losses unless the bauxite issue gets resolved.

The problem there is if you see Sterlite's exposure to Vedanta, technically, the company has only 29.5% equity in Vedanta Aluminum, but the amount of loans which Sterlite has given to Vedanta Aluminum is disproportionately on the higher side compared to the equity which it has. So cushioning all these practices, the number keeps on increasing every quarter whereas Vedanta's share of the debt to Vedanta Aluminum keeps going down. So clearly, there is some sort of asymmetric risk reward between Sterlite and Vedanta when it comes to ownership in Vedanta Aluminum and the debt exposure those two entities have.

The second issue plaguing the stock is what's happening on Sterlite Energy. So unless there is clarity on where that entity is going to get hold to sustain the 2,400 megawatt of capacity on our side, the sentiment is not going to change too much. So clearly, there is a lot of value as far as Sterlite stock is concerned. Fair value is Rs 150 after giving a lot of negative value for exposure in Vedanta Aluminum. But you will have to see some resolution of Vedanta Aluminum bauxite issue, Sterlite Energy coal issue and maybe what's happening on the divestment side when it comes to government stake in BALCO and Hindustan Zinc and how that plays out over a period of time. So I think the stock is quite attractively valued but you just need some triggers for the stock to perform.