SP Tulsian's top picks for your portfolio

Here are the key levels to watch out:

On DCM Shriram

DCM Shriram is an interesting story. It’s a multidivisional company, multiproduct and has presence in sugar, fertiliser, agri products, bio-seeds, cement and presently sugar and fertiliser. Both the sugar and fertilizer divisions have been doing quite well.

We have been seeing the global prices of sugar and fertilizer going up. While the company all along has not been doing so well on the operational front I think maybe going forward these two divisions will be contributing to a greater extent.

All along, the chlor-alkali division has only been contributing to the bottomline of the company and that division is doing quite well too. All the divisions and products are significantly contributing and that’s why I am quite bullish on the stock.

If you see the marketcap, it is also its just Rs 900 crore and even if I take the net debt of the company which is at an equivalent amount of about Rs 900 crore, the EV works out to about Rs 1,800 crore which seems quite low. Once this stock comes on the radar of the investors they are capable of getting good returns.

On Lakshmi Electrical Control

This is a Lakshmi Machine Works (LMW) group company where they make the low voltage stabilizer as well as the plastic machinery parts. The parts for plastic machineries are largely catered to the Lakshmi Machine Works and the low voltage stabilizers have a huge demand.

In fact, this company had some difficulty for FY09 and FY10 because of their 100% subsidiary of a spinning unit which they have hived off. Post that, the company has been doing quite well especially on this low voltage stabilizer.

If I go by their H1 performance, they have a topline of close to about Rs 60 crore and they have posted an EPS of close to about Rs 22 on a very tiny equity of Rs 2.5 crore. The company is debt free. They have the loans and advances given to their subsidiary to the extent of about Rs 10 crore.

If I take the present marketcap of just Rs 80 crore against the expected topline of about Rs 125 crore for FY11 with expected EPS of 46, I think the stock looks quite undervalued. Going forward for FY12, I won’t be surprised if the company will be able to post an EPS of Rs 60.

If this company falls in the smallcap capital goods kind of company where they deserve a P/E multiple of at least 9-10 times as against the larger ones, who are ruling at a P/E multiple of 25-30, you have a very limited downside with a good potential to grow in the next 12 months.

On Crest Animation

Crest Animation is into 3D animation and doing contractual work for the last one year. They have taken a conscious decision of moving into the film production. Their first film Alpha and Omega, a 3D animation film was released in the US last month and it received a good response. Post that, the company has changed their strategy by going into 3D movie production as well as 3D television software production.

Four such projects are underway and I hope they will be able to keep releasing one film every year maybe over the next four-five years because they are the least cost producers of 3D animation films. They have a good track record of completing the projects on time. Alpha and Omega, in which they have 50% stake, was completed well within the three-and-half year timeframe.

The critical part for any 3D animation film is completing it in time and with quality, both of which seem to be existing in this company. It does not have any baggage of debt and with a marketcap of just Rs 200 crore, even if any one of the movies perform well, with the intellectual property rights (IPR) remaining with the company, the stock has the prospect of vastly getting rerated over a period of time. The downside is very limited from hereon while it has potential maybe to give returns of 100-200% over the next couple of years.

On Entegra

This is an S Kumars Group company in which they have 75% stake. They have been setting up hydro based power projects with a total capacity of 400 megawatt with 10 units of 40 megawatt each.

In fact, three-four years back they ran into trouble, where they brought all the subsidiary of the various power projects executing company under this company with this company as an investment arm for all the ten units of power projects which are being setup.

The power project will go operational with one unit each starting from December 2010 as indicated by the management. I hope maybe in six months time, they will be able to complete the entire 400 megawatt. The project is laid on the perennial river where they will be having the advantage of running the power plant maybe to the extent of about eight-10 months in a year.

If I go by the present marketcap of Rs 400 crore with a promoters stake of 75% and even the HNIs are holding stake of about 13-14% in the company with very low floor and even the marketcap of Rs 100 crore, I think it is quite low when you see 400 megawatt of hydropower projects getting completed in the next six months time. This can give good returns in the next one year and I wouldn’t be surprised if it doubles in a year’s time.

Below is a verbatim transcript of his interview on CNBC-TV18. Also watch the accompanying videos for more.

Q: Sticking with the entire midcap and smallcap space, two stocks that have had a relentless run in the last one month have been Alok Industries and Arvind . Both are up almost 50-60% in the last one month. How would you view those stocks now and do you expect some more of a run-up there?

A: They have been running for individual reasons. Alok Industries are the largest cotton manmade fibre makers and they have integrated operations. Now, people are expecting that they will probably be able to sell their property and realize about Rs 1,500 crore that which had been stuck for the last couple of years and that will improve their working.

If you gather from these sources, it is learned that company has had their best time in the last five-six years. In spite of all these problems it will get reflected to a large extent in the working of the company.

In spite of all the textile stocks having participated, epecially the larger ones, Alok Industries has not really participated in the last six months or so. This has also added recently in the F&O segment from the November series. The combination of all these factors has been keeping the interest alive.

In Arvind the story is the same; you have a very good realization for their denim in spite of rising cotton prices. The company should be able to offset that by having a better realization from their finished product denim. They are monetizing their land and using those proceeds to move into the textile retail chain, again focused more on the value added denim products.

If you take the valuation call and if you take two-three larger denim makers like Arvind or Suryalata or Aarvee Denim, you find this space quite interesting. So these are the reasons mainly to keep both the stocks driving up.

Q: Sugar started moving up again in the last couple of days and global sugar prices have also been hitting record highs. Would you back names like Shree Renuka or Balarampur Chini?

A: If you look at the global situation, raw has gone 33 cents per pound, white has crossed USD 800 per tonne and it has crossed a 30-year high. I will first be banking more on Shree Renuka because Renuka has the advantage of having acquired two mills in Brazil. Those units will be able to capitalize the entire benefit of this global run-up.

Plus their Haldia standalone refinery has been exporting from Haldia and that is the reason the eastern market which was earlier captured by the company has now been left open again for the UP based companies and they are again focusing more on exports. So they have a better realization of about Rs 3 per kg. I will first be focusing on those companies who have the advantage of taking the benefits of the export market.

In the last couple of days, the commodity prices have moved even in the domestic market by Rs 1-1.50 paise per kg. In UP, it is getting sold at Rs 29.50, in South it is getting sold at Rs 28. Though the UP based mills are moving to court today where they are filing a petition challenging the power of the state government who declared SAP for the sugar sector but I don’t think that will serve the purpose.

If you have Rs 200 per quintal for sugarcane and if you have expected realization of Rs 30-31 for sugar, I don’t think there should be any complaints. This challenge of SAP just looks a formality.

Overall, yes, there is a positive call but in sequence the top priority will be Shree Renuka. Apart from that the companies who will be getting the export permits which has been cleared by the government which will start getting effected from first week of December. In that category, Dharani, Sakthi Sugars, Shree Renuka will all stand to gain. Overall, there is positive view on the whole sugar sector but more positive on stocks like Shree Renuka and EID Parry kind of stock.