Find out: Angel Broking's verdict on L&T, JSW Steel, HCC

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Find out: Angel Broking's verdict on L&T, JSW Steel, HCC

In an interview to CNBC-TV18, Phani Sekhar, fund manager at Angel Broking gives his evaluation of select stocks – JSW Steel, Larsen & Toubro (L&T) and Hindustan Construction Company (HCC).

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Excerpts from Markets Midday 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 JSW Steel BSE | NSE 29/05/12 Are Mutual Funds betting on JSW Steel? Other Stocks in this news Larsen and Toubro | Hindustan Construction Company |

In an interview to CNBC-TV18, Phani Sekhar, fund manager at Angel Broking gives his evaluation of select stocks - JSW Steel , Larsen & Toubro (L&T) and Hindustan Construction Company (HCC).

Below is an edited transcript. Watch the accompanying video for more.

Q: It's a tall task to reach from sub Rs 1,100 to Rs 1,500 in one month. What is the recommendation that you would give on L&T?

A: These are no levels where an investor should be panicking because a bulk of the negativity is already there in the stock. As you saw from that sub Rs 1,000 levels, the stock has partly rebounded and it's not to say that it will reach Rs 1,500 in a year's time but certainly it is on the right track. It's widely acknowledged that now its infrastructure businesses are going to see a slowdown for the next two-three quarters. That's something that is known and there in the price.

What remains to be seen is if there are some proactive policy measures at the end of the first quarter of this calendar year or beginning of the second quarter. Then you can actually see L&T which is the proxy to the Indian infrastructure story; respond more positively to those kind of measures because the primary problem with L&T today is that the order book is simply not growing. From a 20% growth guidance at the beginning of this financial year they are down to 5%.

As things stand today, investors are talking about a flat order book for the next financial year. So if an investor can have a scenario where for the next one year he is looking at a 10-12% kind of order book guidance. Premature to talk about it right now, but on the back of some proactive policy, if the order book growth improves then there is no reason why the L&T stock price would stay at these levels. All that the investor has to do is if he has time on his side maybe add more and wait patiently but he will certainly get his dues.

Q: What is the call on JSW Steel?

A: The primary problem with JSW Steel was that it had no captive iron ore supply. To that extent, it was heavily dependent on Karnataka and with iron ore mining being banned there JSW faced the brunt of it. As the case comes up for hearing in the Supreme Court in the third week of January, we are given to understand that that maybe in the first half of this calendar year you can have a restarting of iron ore mines in Karnataka although in a gradual manner. So you could look at 1.5 million tonne per month and then you can look at a gradually ramping up of the capacity.

The e-auction prices which had soared initially in the auction through NMDC have also stabilised owing to a correction in the international iron ore prices from the peak to the tune of 20%. So now JSW has built-up inventories to the extent of almost four months of its requirement. These are very encouraging signs because once the iron ore supply is resolved which was primarily responsible for the crippling shutdown of its operations which led to volume de-growth and then which led to profitability concerns, you have a whole lot of issues that will be resolved.

Immediately as soon as you have iron ore problems being resolved you will have volume growth which is projected to grow at around 15-18% over the next 12-15 months. Then you will have profitability that will jump by more than 60-65% and valuations on the back of that look pretty attractive. My advice to investor is that he should hold on and he can at least expect price of Rs 700 in the next 12-15 months.

Q: What is the call on HCC?

A: Apart from the Lavasa hangover that is all over its head there are some structural issues which have turned very serious in this kind of business environment. The nature of its order book is predominantly a very long gestation because it has a huge exposure to irrigation and hydropower. On top of that, you have a working capital cycle which has gone up to almost 350 days and the debt equity is almost 2.8 to 3 times. These are not parameters that are going to excite a whole lot of investors until you have a scenario where interest rates start coming down and you have the order book increasing.

I must say that the order book of HCC is pretty robust at around 3.8 times of this year's revenues but the order book composition alters and very importantly the uncertainty on Lavasa weighs in. Until such time, HCC will continue to be valuable but at the same time remain an underperformer. What the investor needs to do is hold on to HCC at the current levels and have time on his hands, I am sure this is a multibagger on his hands but important thing is he should wait for at least one to one-and-half year.