What to do with UCO Bank, Bajaj Electrical & Phoenix Mills

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Good time to discuss midcaps because this space seems to be moving for the last three-four days. What are you picking for us today?

A: I am looking at UCO Bank because of the interest rates scenario. You have seen that interest rates may come off over a period of time and that will result in some amount of re-rating on the banks. UCO Bank has really fallen substantially. It is presently trading at almost half time its book value on concerns that there were a large amount of state electricity board loans. That seems to be around Rs 6,000 crore of which they really won’t have substantial provisions. The bank is fairly well managed in terms of its net interest margins, which is about 2.2%. It has an NPA ratio of 1.8%. Its capital adequacy is fairly good, it is about 13.97%. Considering the overall valuations, this really looks to be an attractive stock, especially if you are willing to hold on for about a year or so because as the interest rate scenario eases up as we expect over the next 12-18 months, these banks will get re-rated in terms of valuation. I have a target price of Rs 74 on the stock. I think this is a good opportunity to get into the banking sector.

Q: Let us shift focus to consumer durables stock that you have picked as one of your favourites – Bajaj Electrical - it has not had a great run for some time now?

A: Yes. Actually in the last year, the share price had really come off because there was no growth on the engineering and procurement business and the lighting business did not really take off. But our interaction with the management now indicates that the lighting business and the EPC business has started to pick up.

On the consumer durables business, the rural demand continues to be strong and you will see fair amount of growth, both in margins and the top-line on this side of the business. If you looked at the projected earnings for this year, it is quoting at about 10 times its EPS for FY12 and about 8 times FY13 EPS. So this is actually something where you are getting an exposure to the growing consumption theme at almost 8 times or 9 times earnings, which is a fairly reasonable valuation for a company of this size.

Q: You have picked Phoenix Mills that seems to be the increase in rentals story- take us through it?

A: Phoenix Mills had set up five market cities. They have commissioned two of them during this year which gave them a leasable area of about 5 million square feet. The projects which they have under implementation will get completed in FY13 and will increase the leasable area to about 10 million square feet. That is almost double. The company has a net worth of Rs 1,660 crore with borrowings of only Rs 100 crore. So it is not even highly leveraged unlike many other real estate companies.

Rentals are fairly secure because they have already signed up almost 70% of the space on the properties that they have already leased out which is a good sign. Rentals are fairly stable in terms of rates per square foot which is again very encouraging for the company. The very point is that when you look at other projects that are coming in, that will add to the bottom-line.

This year, we expect Phoenix mills to generate PAT of about 110 crore which makes it fairly attractive. Although the sector has been negative and that is why the price of the stock has also come down in line with all the real estate and infrastructure companies.

Disclosures: Lancelot D'Cunha and his clients have investments in all these three companies.