Tulsian picks 3 stocks that can fetch you profits

Below is a verbatim transcript of the interview. Also watch the accompanying videos.

On Lumax Auto

The company makes various auto components like parking brake, gear shifter, chassis, and exhaust system for two-wheeler and three-wheeler. They have a list of clients for the two-wheeler and three-wheeler makers. The company has six plants.

They don’t have much of pricing power. But, they have been moving smartly with an increase in the topline by about 50%. If we see the performance of the company for FY10 or nine months of FY11, the PAT margin has improved by 1%, from 6% to 7%. The topline has grown close to 45%.

If the company has an increase in topline by about 40-45% with an improvement in the margins, they have a very good advantage. They have six plants scattered all over the country which caters to their requirement of their OEM purchasers.

If we see the financial performance of the company, it is likely to post an EPS of close to about Rs 33-34 for FY11. This will translates into a PE multiple of about 4.5-4.6. It is totally a debt free company. The market capitalisation of the company is quite low.

The company has a promoter holding of 51% and the market capitalisation is less than Rs 200 crore. The company’s topline of Rs 600 crore is very attractive due to their volume growth and margin expansions compared to any other auto ancillary.

The share is now ruling close to about Rs 135-136, which can easily move to about Rs 175 in the next six-eight months' time.

On IL&FS Transportation

Ever since the company went public, I have been holding my positive view for it. At that point of time, they issued the share at Rs 258. They have about 22 road projects of which 50% are on BoT and toll based, and 50% are on annuity based. They have a diversified mix. They are not depending purely either on the toll or annuity.

Apart from that, 70% of their orders come from NHAI. They are not much dependent on the state highways or state contracts where one could see a lot of difficulties and lower margin because of the stiff competition by the local players.

If we go by the financial performance, the company has an order book of close to Rs 12000 crore of the projects under implementation. Out of the 22 road projects, some of them are operational.

They have posted an EPS of Rs 14 on topline of about Rs 2400 crore as the financial performance for nine months. FY11 is likely to give an EPS of close to Rs 19. I am quite positive for FY12 going forward. I won’t be surprising to see an EPS of close to about Rs 23-24. If it is multiplied with the current price, it will rules at a PE multiple of 10.

When we compare it with any comparable peer like Gammon Infra or IRB Infra, they have better portfolio of road projects and one would have comfort on the promoters also. Going by all these things, the downside is very minimal, but on the upside, it could be a portfolio stock with an expected return of close to 20% on an annualised basis.

Keeping a view of two-three years on the stock, there wouldn’t be any risk in holding the stock even from a longer-term point of view.

On Fedders Lloyd

The company is providing turnkey air-conditioning solutions to defence, railway and commercial clients. They also are selling air conditioners. This company’s ending is June. If we see their first six months’ performance till December 2010, the company has posted an EPS of close to Rs 7.20 on topline of about Rs 360 crore.

The second half of the air conditioner makers are always better. Considering that, they are likely to post an EPS of close to about Rs 16 for year end June 30, 2011. This will translate into PE multiple of about five times.

If we compare it with Blue Star, Voltas or Hitachi Home Appliances, the share is quite under valued. In the past about six-eight months back, we have seen renewed interest coming back in this stock. The profit booking has brought down the share to these levels.

At an EPS of Rs 16 with PE multiple of less than 5 and growth in place, it is likely to be seen for the next three years from the company to the extent of about 22-25% on topline and bottomline. I see very limited risk downside. On the upside, it can give a return of 50% in eight-twelve months.

Q: There was surge in the ADAG stocks on Thursday. Reliance Power was up by 5%. Do you have any fundamental news there or was it just the expiry games that were being played on those stocks?

A: It is not largely due to the expiry game. There has been news coming in that the company is likely to see financial closure of two-three power projects. One of those may be the gas-based power project in Samalkot.

There might be some clarity emerging on that front too. It is largely on fundamental news that the company is progressing well with the financial closure. This has led to the surge in the share.

Q: What is your view on the SmartLink Network deal that came out on Thursday? The stock came off quite sharply after the announcement.

A: It was warranted. If we see the consideration, they will receive Rs 500 crore. With that, the company will be left with nothing. The business that was sold was contributing 90%.

Today, the share has been ruling cash in the balance sheet of around Rs 425-450 crore net of taxes. It has a market cap of close to Rs 225 crore after the correction. The cash to market cap is at 0.5.

The similar kind of transactions has taken place in cases of Borosil , Piramal Health , Gwalior Chemical and Riddhi Siddhi Global . All these companies are sitting on a cash to marketcap of 0.25-0.3.

Riddhi Siddhi Global sold their business for Rs 1200 crore with a marketcap of Rs 300 crore. Borosil sold their business at Rs 875 crore with a marketcap of less than Rs 300 crore. Similar was the case with Piramal Health and Gwalior Chemical.

I am even negative now. This stock might correct further by about 10-15% as it should not rule more. I am taking a cash of Rs 425-430 crore in the company’s books. The market cap should not be more than Rs 175 crore for the company.

Q: What did you make of the AP Paper deal? Should you tender in the open offer?

A: One should tender in the open offer. The stock will take a pause or settle at Rs 375. In this exuberance, one should not look to buy it beyond Rs 375. Those who are holding the stock for quite a long time with may be less than Rs 10-15, they can contemplate exiting from the stock at Rs 375 in the secondary market.

Considering that the acceptance ration is likely to be 2:1 out of 2 shares tendered, the share is expected to settle at around Rs 180-200 post open offer. This should be the strategy.

People have been quite bullish on this stock. This stock can go up to Rs 400-450 compared to other paper stocks. I don’t see any reason for other paper stocks to participate. For AP Paper, it should settle at Rs 375.

Q: There have been talks about RIL doing well in the month of April. Historically, it has been a good month for that stock. Leading up to the earnings, do you see RIL will be able to put on Rs 100-120 or is that unlikely?

A: It looks unlikely. Their petchem and refining margins have been doing quite well. The refining is having a GRM in two digits. Petchem also may not have seen this kind of a margin. It will get negated to a large extent by a drop in the gas production.

Today, there has been news that the government is thinking of reallocating the gas amongst the user with allocation to the high priority sector. If this happens on a net basis, RIL won’t be able to post their bottomline beyond Rs 5000 crore on a quarterly basis.

I won’t be too enthused on the stock beyond 1050, as one has to see the Q4 results before. By that time for the next one month, I will keep my level at 1050. The moment we see stock crossing that limit, we will see profit booking coming in. The 1150 level or rise of 100-120 from this level is unlikely.

Q: The 2G case hearing happens in the Supreme Court today. Has the market sussed out? What will be the maximum or collateral damage of this issue?

A: The fear might be receding. Four days back things were a little scary, but now, the things are settling and might confined one or two companies. The other two listed companies like Unitech and RComm won’t see much damage.

It is difficult to take call on. Things don’t look scary for any of the listed stocks from here on. All the apprehensions have been factored in the price. We have seen some of these stocks moving up in this last couple of days or so.