Which stocks merit a buy, which to sell right now?

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Asian mkts could correct 20-25%: Bank Julius Baer Consolidation, profit booking seen ahead: Experts 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 Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty? Other Stocks in this news Chennai Petroleum Corporation | Hotel Leela Venture | Mercator | Manali Petrochemicals | Mangalore Refinery and Petrochemicals | PTC India | Shalimar Paints |

Harendra Kumar , Head of Research at ICICI Direct has suggested that he would sell PTC and Mercator Lines now. He thinks it's time to take some profits in Hotel Leela.

 

Mudar Patherya , Investment Advisor informed that he does not believe in the paint story. He is positive on Manali Petro.

 

Excerpts from CNBC-TV18's exclusive interview with Harendra Kumar and Mudar Patherya:

 

Q: You would sell PTC now on account of the heady run the stock has had?

 

Harendra Kumar: Absolutely. If you look at it, it has become a two-three bagger from around Rs 50 levels. The run up has been fast whereas the cash flows are likely to come over the next two-three years.

 

So I think price-wise, it has come to the target price. But time-wise, I think we are too early. I think at some point of time when earnings do not catch up, the price is likely to correct and that is when the opportunity to re-enter would come. So at this point of time, you should take your profits.

 

Q: Let us talk about one stock that has been a circuit favourite, Manali Petro , do you think this is a good time to get out of this stock?

 

Mudar Patherya: Manali Petro looks interesting - on the basis of earnings we often likely to say that in a bull market we have all kinds of stories - who is selling out to whom, etc.

 

Just go by earnings; very safe indicator. Company that earns a crore of net profit in a particular quarter is priced in a market at 336 crore, which means that if the company continues the way it has been, I would presume that it will earn about 5 crore in the current year or rather in the next four quarters. If it earns 5 crore, then it is going to take us seventy years to get back our investment which means that I will not be able to recover the returns in my lifetime, at least. So I think on the basis of that, it is best to get out of Manali Petro, share a strong good buy as long as earnings remain exactly within this guideline.

 

Q: What about something like a Hotel Leela , it has only just begun to move in the past fortnight or so what do you do with the stock?

 

Kumar: It is moving up because of the new story - that is Blackstone taking investment. But if you look at the business, I think all the projects that are going to come up are probably around '09-'10 and in current valuations, I think it is priced in. So I think the fair value is anywhere between Rs 55 and Rs 60 and it has moved up and it is time to take some profits from this stock because from hereon, it will probably consolidate and maybe our portfolios could languish holding on for some more time.

 

Q: You would sell Mercator Lines as well where the run has been equally spectacular?

 

Kumar: Absolutely. You have two or three baggers in a short span of time. Probably a news value unlocking whatever but considering the market and considering that it's giving you fabulous returns, you should take some profits if the market corrects. Or if there is a midcap or a smallcap correction you could get this same stock; good companies at fairly lower valuations.

 

Q: Just a couple of days back we had that frenzy which we have seen in the past in tea stocks, they moved up for a couple of days - do you find any fundamental reasons for tea stocks to go up or would they also qualify sells in your book?

 

Patherya: I would be advocating a sell on tea stocks yesterday, today, tomorrow whenever you ask me I will always tell you to sell. There is very simple reason for it; you buy into a company because of a prospect of not necessarily always a price improvement but production growth. In the tea industry I do not see any production growth happening because there is a limit on how much the land can generate unless a company buys more gardens and does not increase its equity or there is a merger on acquisition which maybe a very focused and very specific development.

 

But if you ask me what is going to happen to the tea industry, I would always tell you to sell irrespective of whichever part of the cycle I am at, because even if there is upward price correction, it will only be an upward price correction - not a production correction. You have a sustainable boom, you have wealth creation, if you have production increases and you have price increases in the tea industry I think you can largely forget about big production increases unless yields go bizarre and I do not see yields going bizarre. So I would say that price correction; I will only play it on a speculative basis. So for me, investment in a tea company would always be speculative and not fundamentally driven for the long-term. I will always tell you to sell.

 

Q: What about the big stars of the midcap space these refining stocks?

 

Kumar: Refining stocks they move as a pack but you have got to differentiate between the good ones and the bad ones. MRPL is far ahead of its valuations even Bongaigaon . Chennai Petro is very fairly decent bet in this space. Refining margins are going to continue to go up and demand-supply mismatch plus India is going to be the Asian hub for some point of time. So as a sector, it should do well.

 

But it's better to pick the winners. Early stage of the rally, you could see most of these stocks rallying but over the longer-term it could be probably RPL, RIL and Chennai.

 

Q: Are not a big believer in the paint story or is it Shalimar Paints that you don't like and would sell right now? 

 

Patherya: No, I do believe in the paint story. But if you ask me whether I am going to put my money on say a Berger or a Shalimar, that takes a little more guts than usual because when do you really make money on the markets?

 

Wealth is created if there is a PE growth and if there is an earnings growth. I think there is going to be no PE growth happening in the paints industry and the paint industry stocks will move ahead only on incremental earnings. So based on that, I would not get into a paint story at the moment and when you ask me specifically about Shalimar, I have seen the numbers. They have earned about Rs 2.3 crore in the last quarter, which is fairly good given their earnings track record.

 

But if you look at market cap, it is Rs 175 crore and even if you be an extremely optimistic person and you assume that they are going to earn about Rs 10 crore post tax in the year, they are still factoring the company at a multiple of 17. There are various stories and theories and theories that somebody is getting into the company, somebody is taking a stake - so now you also got to get in. I have two very important arguments at this stage.

 

One, is clearly fundamental that the minority shareholder doesn't have an iota of insight as to why the new entrant is taking a stake. So, he/ she is more likely to sell out seeing the high prices and secondly, even if the new entrant does come in at the PE of 17, isn't growth or the new entrants contribution also factored into an extent? So I would probably sell out of Shalimar Paints and get into a stock where there is a prospect of a PE growth and an earnings growth. So I would say even if you are iffy about Shalimar, I would probably say on the better side of caution would be get out and go into stock where there is absolutely no argument and where there is going to be an aggressive two pronged growth.             

                 

Disclosures:

 

Harendra Kumar:

 

It is safe to assume that my clients and I may have an investment interest in the stocks / sectors that have been spoken about.

 

Mudar Patherya:

 

I hold none of the stocks.