What a dream run it has been for the Indian equity market in 2017 - and who would have thought. If we rewind back and talk about all the gloom and doom that were surrounding us back in December of 2016; demonetisation and impending huge indirect tax reform. Well, the Indian market has come a long way and come on top.
What a dream run it has been for the Indian equity market in 2017 - and who would have thought. If we rewind back and talk about all the gloom and doom that were surrounding us back in December of 2016; demonetisation and impending huge indirect tax reform. Well, the Indian market has come a long way and come on top.
In this CNBC-TV18 special show '18 for 18', star-studded panel of market experts - SP Tulsian of sptulsian.com, Prakash Diwan of Altamount Capital, Ambareesh Baliga, Independent Market Expert and Mehraboon Irani of Gini Gems Consultants gave 18 top ideas for 2018.
Below is the verbatim transcript of the interview.
Surabhi: CG Power, a company that has gone through the motions splits its business into different verticals, is there a big turnaround in the works? What are you expecting from the performance going forward?
Tulsian: Actually, CG Power did a mistake of foraying into the overseas business and that was the biggest mistake they did in 2007. In fact their domestic business has been doing quite well and having realised that mistake the company has started in fact monetising all the overseas assets maybe for the last three years and now that seems to be coming to an end. They have sold their Ireland unit, Germany unit, Brazil, US everywhere except for Thailand, the transformer making unit which has turnaround and now contributing n a big way so practically if you see pending amount to be received because many of the deals having concluded in the last six months or so, still they have to receive the money from the buyers of those units.
And if one sees the financials of the company of September, 30, you will find that on a net of basis, it is a debt free company, maybe with some cash in their hand. And now, company is totally focusing on the Indian business. And as I said, the Thailand business also, which is profit making. If I just quickly go through, they have a very strong presence in power system and industrial system and now, the two areas, one is transmission and distribution and second is railways. We all know that railways are now migrating from the diesel to electric locomotives. There the company is enjoying a very good competence and that is going to give them a very good leeway going forward. In fact, an order of about Rs 111 crore has already been received from the railway recently in the last one month by the company.
If I quickly go through the financials of the company, it has already posted a standalone income of about closer to Rs 600 crore with earnings before interest, taxes, depreciation and amortisation (EBITDA) of about Rs 250 crore. And interest, as I said, major amount has been received in the second half or maybe is going to get received now. The interest liability was Rs 106 crore and in spite of that, company had a profit before tax (PBT) of Rs 85 crore and profit after tax (PAT) of Rs 70 crore. So going forward, maybe for FY19, I am not banking too much on FY18 because that is more for the balance sheet cleaning, this can, stock is seen to be an inflection point because of their core competence and focus on the domestic market.
So taking all this into consideration, equity is also seen to be quite low at Rs 125 crore. And if I take the market cap and enterprise value (EV) because as I said, it is a debt free, it is about sub-Rs 6,000 crore and generally, if you take a comparable peers, maybe like ABB, Siemens and all that, they always rule at an EV to sales of about six times, maybe five to six times, while this company is ruling at an EV to sales of 1x. So tremendous potential going forward from FY19 onwards. Promoter stake is 35 percent, but the institutional holding is at 52 percent. So taking all this into consideration, one can keep a target of about Rs 115 in the year 2018 on the stock.
Nigel: This one is a rather interesting one, Engineers India (EIL). I remember they came out with a good set of numbers and the stock was on fire from there. You believe that it is good for more?
Diwan: Just before I start explaining EIL and the other picks. I just wanted to caution people that this is the first time that instead of focusing on target price, we are also talking about a decent level or zone to get into. And for this stock, you very rightly said, ever since the earnings came through, it has actually moved up significantly. But I believe you will get, the market will offer us a decent opportunity to enter some time in the first half. Maybe the first quarter itself of 2018. So, hold your horses, do not go and buy on Friday morning or Monday morning. Give time for these stocks to come into the right zone for your buy to make meaningful sense.
And EIL, at current levels is also discounted fairly well. The reason being the earnings in the hydrocarbon business is a lot dependent on execution and there is a long way, the projects are with a very long cycle in mind. It is not like consumer goods or autos where everything is very visible. But my sense is EIL is in a very great sweet spot. You have seen crude go up suddenly. When oil marketing companies (OMC) are sitting with the kind of money that they had, they are no more going to enjoy themselves the way they have done for the last two years. They will have to invest into backward integration and put a lot of money into the refining side.
And what is going to happen is scale is going to become critical in this business. So the smaller refineries will have to scale up or die. When that happens, companies like EIL starts getting a lot of businesses, a lot of order booking. I will not be surprised if they cross Rs 21,000 crore by 2020 also which is the next 15 months. And that translates into some very decent operating leverage coming in because you really do not have to deploy too much of assets to be able to execute that.
And the marching trajectory will also improve because they have started focusing a lot on project management consultancy (PMC) which is very similar to what NBCC does on the construction and infra side, EIL does on the hydrocarbon side. So it is just project management consultancy which pays them much more, the return on equites (ROE) are better. So all said and done, it is a great stock to have in your portfolio but buy it on lower levels.
Surabhi: How much lower would you say?
Diwan: I would give it a range of Rs 165 to Rs 170-175. Also, potentially if something goes wrong with the market, there is a correction which is significant enough. And this time around, out of the picks that we have, quite a few are futures and options (F&O) items. So you also have the potential to hedge your buying on the cash side. So EIL, at that level would make sense. You could keep on accumulating. The target is about Rs 220-225 which is not much from current levels, but it will be about 25 percent from the level that I am talking about.
Surabhi: You have chosen Cummins interestingly. Company was in the news and of course, merger and acquisition (M&A) news was denied. Also, going through a bit of a management overhaul and change. What do you see ahead?
Baliga: More than the management overhaul, I think it is the sector which is under question. Whenever you talk of Cummins, you talk of internal combustion engines. And when you talk of that, the first thing which comes in your mind is electric vehicles. Now what happens to internal combustion engines over the next couple of years? But yes, I think electric vehicles will take over, no doubt. But that is still some time away. And by the time the internal combustion engines are completely out, I think it is going to be a couple of decades.
So, there is still a good run left for Cummins and at the same time, Cummins is also working on electrical engines and they are already testing out in the US. By next year, you will have most of their buses out there running on Cummins electrical technology. So, clearly their research and development is extremely strong and Cummins India, clearly has an edge from the parent. So looking at all this, looking at the way the Indian economy is expected to grow because this is clearly linked to the Indian economy because with the infra growth, with the growth in railways, clearly Cummins is going to benefit, no doubt, and balance sheet is in extremely good position, hardly any debts.
So looking at about Rs 20 earnings per share (EPS) for FY19 and about Rs 24 FY20. This stock should not be bought immediately because like you rightly said, it had run up because of the rumours. So on some sort of a correction at possible levels of about Rs 860-870, it could be bought for a target price of about Rs 1,200 or so.
Nigel: You are looking at a stock, Asian Granito India. I remember the stock at around Rs 50 a few years ago. Then it had a big run. Promoters bought from the open market as well towards the end of last year. Trades at a bit of a discount to larger peers. You think that is good?
Irani: This is a stock recommended earlier by me and it never made me think more than a minute to take a call that this is also a stock which I would like to be loyal to and believe that this stock should be at least a Rs 750-800 over the next 12 months. Asian Granito, let us look at it. It is the third most profitable tile company in India and it is the fourth largest in terms of turnover because in turnover, Johnson Tiles is ahead of it.
The company has achieved this, worked very hard over the last 2-3 years, has reaped economies of scale, has merged various subsidiaries. It has concentrated on introducing new products, has concentrated on high margin products expanded into new geographies, expanded its dealer network and worked on enhancing its brand presence. Earnings per share of Rs 13? 2016-2017, Rs 13? Why should the stock be at Rs 530-540? The reason is, I believe the company should report compounded annual growth rate (CAGR) growth of at least 40 percent over the next 2-3 years. And I will not be surprised if the company has earnings per share of around Rs 35-40 by 2020. Now what valuation do you give? 20? The price is Rs 800. At 35, the price is 700. The stock is right now Rs 520.
And I do believe that yes, as and when the market has suffers a minor accident, the stock should correct 5-10 percent. So what? As long as I see a price of Rs 700-800, why should I bother about a 5-10 percent correction? Because, people have been waiting for a correction for quite some time and the stock has run away like you rightly said. So at Rs 525-545, if I see a price of Rs 750-800 which is my target, I think I am investor in this stock.
Surabhi: Next stock on your list is AksharChem India, interesting place Speciality Chemicals, I was trying to do whatever little reading I could after the market, so vinyl sulphone I believe is a big product for them what could be the triggers here for this company?
Tulsian: In fact I would say that the company has two product profile one is dyes and pigment and second is dye intermediates. Take the dyes and pigments - CPC Green, CPC Blue are the main products and if you take dye intermediates then vinyl sulphone forms the big this one, they are foraying into the H-acid also which is again a dye intermediate plus they are foraying into precipitated silica also.
Under the expansion, company is carrying out an expansion of about Rs 175 crore which should get completed may be in six months’ time and in fact in spite of such a big Capex company will remain a debt free because for the simple reason that they raised about Rs 69 crore with the qualified institutional placement (QIP) having made in the month of July at Rs 776 and now the share is ruling closer to about Rs 700. If you see last year that is FY17 had fabulous year for the dye intermediate largely because of the increase in the prices of vinyl sulphone, H-acid, J-acid, gamma acid and in fact many of the players pure the dye intermediates have really shown excellent numbers. So, while comparing year-on-year in spite of company having posted an earnings per share (EPS) of Rs 21 for H1 share price has corrected because obviously market had disappointment because there was a drop of about maybe 50 percent in the profits after tax (PAT) and the share corrected from a top of Rs 990 to the present levels of Rs 700.
If you see the theme going for the dye intermediates and dyes and pigments both are doing very well. They are the largest exporter of vinyl sulphone from India having 45 percent market share plus they are having one amongst the largest producer of CPC Green amongst the world having the 10 percent market share. So, once they will be having this expansion completed in next six to eight months their topline will increase by about 80 percent giving excellent operating leverage.
As I said company will continue to remain debt free. So, if I have a H1 EPS of Rs 21, H2 is definitely better because of the increase seen in the realisation in margin of dyes and pigments and dye intermediates. So, take Rs 45 as EPS for FY18; for FY19 I think that will be a real big explosion in earnings. I won’t be surprised to see an EPS of about Rs 75-80 also for FY19 and that will really be a big kicker for the company to post growth in its topline as well as in bottom-line. Maybe topline will show a growth of about 60-65 percent bottomline will show a growth of about 80-85 percent. So, taking that into consideration share can give you a level of about Rs 880 in a six months or so which is now ruling closer to about Rs 700.
Nigel: Your second pick for today Kirloskar Ferrous Industries capacity utilisation levels lower, so it is given that headroom and I think balance sheet not to bad?
Diwan: I think the rally on metals will possibly continue and percolate now from the largecaps to some of the select midcaps smallcaps also. In fact this is one of the very few small caps that I felt still hasn’t got re-rated crazily upwards and lost out on the potential to buy in. What is good about this company is one is of course the pedigree is very strong and as you said financials are in place. They have descent cash on the books, debt-equity ratio of just about 0.3, they would move into return ratios of 20 percent plus, 21 percent plus in the next year- year and a half. They are into castings and pig iron, their two primary business. Now the pig iron business is very simple to kind of understand, but the moment application of steel goes up the conversion from iron ore to other forms of steel needs pig iron. That is an intermediate stage that you have to go through.
Now what was happening is Karnataka unit which was there since a long time never had order books which are very decent, but lot of these mines that have re-opened around Bellary and all that and that is giving them a huge advantage. So, they will get operating leverage and as you said castings are using 50 percent capacity they have already done enough Capex they don’t need to put in more money. Castings what do they make? They supply a lot of equipment’s to agri equipment manufacturers. So, it is tractors, tillers and that is an area which all of us love, so there is so much of an upside there. So, this is in a sweet spot, has a very good relationship with clients for long years, Kirloskar pedigree to back it and interestingly last quarter some of the domestic institutional investors (DIIs) increased their stake in this business also.
So, I think it is probably that stage where it is getting kind of ready to take off. I would give it a target of about Rs 145-150 whereabouts but you could buy this at current levels or at dips and definitely it will be seeing some major moves for the 2018 kind of period.
Surabhi: You are trying to pick the bottom for this one because this is the non performing stock. Videocon is what we are talking about - Dish which will merge with Videocon. Average revenue per user (ARPU) has been suffering, we know the story but everybody is waiting what happens after the merger if then there is a mark change in the business?
Baliga: Generally, sectors like these pass through couple of phases. The first phase is when there are too many competitors, margins are under pressure and then you get into a phase of consolidation. What we have also seen Dish taking over Videocon. So, post the phase of consolidation you normally have the margins starting to move up and that is what I see happening as far as Dish is concerned. Secondly, we have seen that ARPUs were bad, they are improving and they have stabilised at this point of time. I expect that to improve going ahead.
Thirdly, you have these multiple-system operator (MSO) where major competition and there was a huge arbitrage in the pricing of MSOs as compared to the Dish once so that arbitrage has reduced which is also positive for Dish. We are expecting that Doordarshan which is free to air may not remain free to air going ahead. So, looking at all this and the sort of subscriber additions they have been doing in the past couple of years I mean that has been superb although ARPUs were not up to the mark but subscriber additions are superb. That will start paying off now.
Because even if ARPUs move up by other say Rs 10-15 that is a huge addition to bottom-line. The most important thing what has happened is on the valuation front because all of them were getting decently low valuations but with Warburg Pincus deal we are clearly seeing that Dish seems extremely cheap as compared to Airtel DTH. I mean looking at the valuations they have given, so that valuation gap also is there. So, from that point of view I think this stock can move up from current levels of closer to about Rs 80 to Rs 110-120 which is a conservative estimate for possibly the next 8-12 months but if you are looking at EPS for FY20 which I expect to be about Rs 4.50-5 at that point of time you could possibly see the stock at much higher levels.
Nigel: Would you buy this stock on the dip or at the current levels?
Baliga: I think at these levels there is no harm. But generally what I recommend is buy in various tranche. Don’t buy everything at one go. Because this market has lot of fluctuations. So, I think you should buy possibly about 4-5 tranche, whatever you buy.
Nigel: You have got a chemical company that you are looking at and when I was growing up I used to watch lot of CNBC-TV18 and a couple of factors one is promoters increasing stake and if it has a clean balance sheet those two factors always stood out from the simplest investing point of view. What is the pick you have next?
Irani: Nigel, I think you have worked already on this company and I would say that I am very gung-ho on this stock. The company’s names is Fineotex Chemical which is also known as FCL. Let us put it this way the company is one of India’s largest textile chemical manufacturer which provides customised solutions to the entire gamut of activities in the textile sector. It services a customer base which is in a way sticky, it doesn’t move to any other chemical manufacturer so easily. It has a high pricing power, there were higher margins. It has got its manufacturing facilities in Navi Mumbai and also a subsidiary called Biotex in Malaysia where the company has got 68 percent stake. It is a Star Export House has presence in 33 countries and what you rightly said balance sheet absolutely clean.
Rs 22 crore equity, Rs 11 crore shares because it is Rs 2 face value, zero debt, consistent dividend paying company. Earnings per share of around Rs 1.80 of last year should at least become to Rs 2.50 this year and should move to Rs 3.50 to 4 next year. This is without one major trigger which I am coming to I think early this month in the very same place Bombay Stock Exchange the company was rewarded as the fasted growing chemical manufacturer in India. Now the company has developed a product in Malaysia using European design engineering which is styled as Aquastrike VCF.
Let me explain to you what is Aquastrike VCF is? This is an environment friendly non-toxic revolutionary solution which doesn’t kill mosquitoes alone but kills the larvae and the pupae of mosquitoes. Completely eradicates mosquitoes. The ministry of health in Malaysia’s has already given it a go ahead. It can be used by common citizens like you and me directly. It is a non-pesticides, not poisonous to humans and they have already effected sales in Singapore and Malaysia. The company has applied for patent and has also applied to the WHO and the numbers as far as the financials goes which I have mentioned is without taking into account any sales from this product. But I believe this product has a potential to deliver business of billions of dollars in the years to come for this company.
Rs 22 crore equity, again I repeat with zero debt, promoters have increased their stake from 62 percent to 72 percent over the last four years. They declared a bonus issue in 2014-2015 and have reserves of over Rs 100 crore on an equity of Rs 22 crore. I think with an earnings of Rs 2.50 coming in the current year which can go to Rs 3.8 as I rightly mentioned the stock at Rs 50-52 is a clear steal and I think a price of Rs 80 to even Rs 125 can come over the next 12 months.
Nigel: You are looking at a cement company? Give us details there. What is the target price?
Tulsian: In fact, we have been keeping extremely bullish view on cement and in fact, I will not be surprised to see the average capacity uitilisation which is now seen at around 70 percent across India will get increased to about 85 percent. And in that theme, JK Cement, in fact, what is happening, market is giving good valuation to the companies having capacity of 10 million tonnes. In fact there are three layers, 10 million, 25 million and 50 million.
And 50 million and above only falls one company that is UltraTech and there are many companies in the 25 million space and 10 million also. So if you take a call on this company, they have a 10.5 million grey cement capacity. Apart from that, they are into white cement also with a capacity of six lakh tonne per annum with a 45 percent market share and if you take a call on white cement, it is a duopoly market. Only two players are there. One is JK Cement, second is UltraTech.
Apart from that, they have the wall putty of seven lakh tonne per annum. And in fact, the financial performance for the first half, generally cement companies are posting an earnings of about 33-40 percent in the first half and with not a significant growth having seen in any of the companies for this H1 FY18, if I really take a call. But this company has shown extremely better numbers for H1 FY18 over H1 FY17. And if I just take a call, Rs 15 EPS was last year in the first half and this year it is Rs 25.
And second half, they had about Rs 25. So if you take in all, about Rs 37-38, EPS which they have posted for FY17, they are going to end this FY18 with an EPS of abut Rs 60. Now, come on the financials. Very low equity at about maybe Rs 70 crore with a face value of Rs 10 and market capitalisation or the EV is quite low, seen at about Rs 7,600 crore as market cap and EV at Rs 9,100 crore. And that translates into cement per tonne capacity at about USD 110. But the best part is that the company has already taken up the capacity expansion to 14 million tonne and that should get completed maybe in the next 12 months or so.
And I am expecting that company has given a capital outlay of about Rs 1,500 crore which translates at about maybe USD 65 per tonne. And since the company has cash accrual of about Rs 9,00,000 crore, they should be largely have this entire capex of Rs 1,500 crore from their internal accruals. That means not by increasing the debt, keeping the debt at constant level of Rs 1,500 crore. And excellent, maybe for FY19, I will not be surprised to see the EPS moving to about Rs 78-82 which is likely to be at about Rs 58-60 for FY18. So taking all this into consideration, share is likely to give a level of about Rs 1,370 in 2018 which is now ruling at sub-Rs 1,100.
Surabhi: Finally time to pin you down because incidentally, we were just having a discussion on the show. You like aviation, but you would not give us a stock name till now. So let us hear it.
Diwan: That was still market hours. I am very positive on the fact that this is an extremely difficult and risky business and we still have the listed players doing very well. And the reason is because we are probably at the take-off stage for the entire sector as a theme within the country. And I was surprised pleasantly to hear that IndiGo has been the first company to have taken off 1,000 flights in a day. Now 1,000 flights in a day is really big and very few companies have been able to do this in such a short span of time. But here we are not talking about IndiGo. The pick that I have is Jet Airways.
Surabhi: Despite the run up. That is what I think. Despite this massive run on the stock already.
Diwan: On crude, yes.
Surabhi: On Jet Airways itself.
Diwan: But it is like this. Everybody is expecting IndiGo to be so well performing that if there is any slippage in their performance metrics, people will punish it. But if Jet does even half as good, they want to reward it amply. So that is the whole expectation from Jet because it has been a down and out
People who have flown Jet Airways know that it is primarily because of the connections that they have in certain sectors and the JPMiles that you get, that boasts business class travellers also on the corporate side. But, my sense is Jet has started doing a lot of things in terms of cutting down costs. Their efficiencies would change dramatically and if you have a KLM or an Air France or somebody bailing them out on the balance sheet, apart from profit and loss (P&L) the balance sheet will also start getting repaired quite well. And if you notice, quietly, there has been a reconstitution of the board itself.
So, from a lot of people who are just iconic names and generalists, sitting on the board, they have actually got people with experience from aviation and similar sectors and that is driving things very rapidly. So if Jet transforms itself, it will get rewarded very easily. So I am expecting that to be a turnaround story of sorts.
Surabhi: So how much more in 2018?
Diwan: I would not be surprised if it goes to that Rs 1,100 kind of a mark as well. So I know it has already moved quite well, but it will be volatile, it is not going to be a smooth ride. But it will reward people. Patiently hold on to it, especially this year.
Nigel: Your next pick? A banking pick?
Baliga: Yes, it is Karur Vysya Bank. So I would say this is a prime example of why you should stick to your core competence, why you should do what you know best. Because, they understand retail and small and medium enterprises (SME). But they wanted to get into big ticket and that is where they have got stuck with NPAs now.
The other thing is as far as banking is concerned, clearly, this is true for a number of other sectors but especially banking, it clearly depends on who is leading it. And, we have seen this happening in IndusInd Bank which Mr Sobti took over and then you saw IndusInd doing extremely well. Federal Bank, more recent, Shyam Srinivasan took over, is doing decently well. So here also, there is a change of management at the top. Mr Seshadri has joined in who has years of experience at Citi and he is expected to change the face of the bank. And now with clear focus again back on SME and retail, I actually expect this bank to start doing well, possibly after a gap of either 3-4 quarters. That is the time it will require to clean up.
Looking at an EPS of about Rs 8 for FY19 and about Rs 14 for FY20. So again, looking at the capital adequacy which is at a decent level. There has been an infusion of funds. That is two rights. So, I expect the bank to maintain those NIMs currently and expect that to move up in FY19 and FY20 because of which you will have the EPS moving up. So the downside at these levels of very minimal. That is what one should look at whenever you are buying stocks at Sensex 34,000. So upside I am looking at is about Rs 160 in the next 9-12 months.
Surabhi: Your next pick is Edelweiss. Now already up 200 percent, so I want to understand what do you think is the biggest driving factor. Is it simply a growth play?
Irani: I think it has been very consistently positive on Edelweiss. I think CNBC was a channel where I had recommended first time at maybe around Rs 120. Rs 120 became Rs 300. A colleague in the office told me, you are being greedy by recommending this stock all over again. I said yes, bond yields at the level at which they are, inflation could become a dirty word, at least in the first half of 2018, interest rates possibly the cycle could turn. Should I actually recommend Edelweiss? And my answer was 100 percent yes.
Can the stock came down by 10-15 percent? Certainly, yes. But will it be a Rs 450 stock which is my target over the next 12 months? My answer is again yes. So I think Rs 290 becoming Rs 450 is happening, it will happen. And Edelweiss is not the small player in the capitals market segment which it was years ago. It has evolved itself. It has gone into lending business, started with wholesale lending, now into retail lending where it is meeting with a lot of traction.
Point number two, it is into asset management business, wealth management business, but the biggest trigger is the stressed asset business where the company is number one by a big distance over the number two and number three player. As far as insurance business goes, I think the losses should peak out over the next 12 months and the biggest contributor apart from the asset reconstruction, stressed assets business over the next two years according to me could come from the wealth management business, the advisory business and the asset management business. Earning could show an exponential growth over the next 2-3 years. It is difficult to quantify it. Current year should be Rs 10 EPS which should possibly become maybe Rs 20 in the next two years, I do not rule it out.
So Rs 290 looking at it, like you rightly said, Rs 100 becomes Rs 290, should I buy into it. The answer is if it becomes Rs 450, why should I possibly bother of Rs 230-250 coming again. I would put it that way. It is very difficult to time stocks like Edelweiss which is showing exponential growth. So I will stick to it and recommend it as one of the best picks of mine for 2018 also.
Surabhi: Coming to your next pick and that is Jaypee Infratech, very interesting, people are wondering how it will eventually all pay out to the courts and through the bankruptcy proceedings, what is the sense and what is the trigger here?
Tulsian: Take this as a wild card entry and if you really take the situation, two stocks I will quickly I am not trying to give any comparison the two stocks one is DB Realty and second is Reliance Communication. The movement we have seen any kind of favourable indications coming in either by way of favourable 2G orders DB moved up by about 60 percent in two days or three days. RComm the moment we have seen debt resolution scene happening the stock moved up by about 100 percent in this last couple of week. If I just quickly come on Jaypee Infratech the company has 165 KM Pune Expressway with a residual concession period of 30 years. Generally, in all road projects you have a total concession period of 20 years here it was 36 years of which they have completed six years so they have residual concession period of 30 years. Apart from that they have Rs 27 crore sq feet of land under development at five locations. One in Greater Noida, two parcels in Gautam Budh Nagar, one in Aligarh and one in Agra.
If you really take a call right now affordable housing is the only sector where the tax free income is allowed by the government of India none other sectors have that. Of this Rs 27 crore sq feet company has only taken up development of Rs 6 crore sq feet for which the litigation in Supreme Court is going on. Supreme Court earlier directed the JP Associates the promoter to deposit Rs 2,000 crore but then they have reduced that to Rs 550 crore of which Rs 425 crore has already been deposited. I don't think that Rs 125 crore being the last instalment is going to get default by the promoter that is JP Associates on January 25th. Apart from that 20 potential acquirers, you just name who is who, they are lined up to take up this company they are going to be quite aggressive because two portfolio one is Rs 21 crore residual sq feet of land under development and 165 KM.
Today if you all have read the report about 5,000 flats will be delivered by the group by March 2018 of them some of the flats are of JP Associates also some of them are Jaypee Infratech also. So, once you have any kind of resolution seen in sight coming in and you will see the stock just running up. I just gave those two examples, the way it moves up on the downside, even on a valuation kind of bases if you take say Rs 500-600 sq ft land development that is seem to be quite low. So, given a target of Rs 24 in the year 2018 but one can even keep a time horizon on the stock till 2018 to see may be higher gains more than Rs 24 also.
Nigel: You are picking up Camlin Fine Sciences. The stock has flattered in the past to only deceive but this time you believe it is good for more?
Diwan: Yes, because it has been a laggard of sorts. Let me run you quickly through what it does and that is what makes it so compellingly attractive. This company is the third largest player in antioxidants and food flavours which is something that is very unique in terms of chemistry and is not easy to replicate. The problem with them was that they have not been able to scale up, but what has now happened is that their Dahej unit in Gujarat, there is a financial closure they have been able to manage. They raised some money through promoter preferential allotment and some QIP which was very small though.
Now once it gets into this whole value chain from raw material to final food blending and especially in the export markets in the US and all, and you all know that US is picking up dramatically and is expected to do so in 2018, I was looking at a theme which is linked to the US growth story and was into chemicals and had no competition and this qualified. My sense is it could see a growth of about 30 percent on revenues and EBITDA could probably double in these next 18 months. So that is where the story lies. Even if you discount FY20 earnings which is 15 months away, probably with even 21-22 you get a target price of Rs 199-200 which is a decent upside from where it is. So hopefully, it will make the right noises and not disappoint this time.
Surabhi: Moving to your next pick, I must say I really like their tagline, 'It's the way you make me feel', Monte Carlo. But, coming to the stock itself, the issue price was Rs 645, if I am not mistaken. Stock has gone through its own journey.
Baliga: It has been an underdog completely.
Surabhi: So what is the trigger? What is changing now?
Baliga: We remember Monte Carlo only during winters. That is the time we hear about it. So clearly the business was seasonal. And what affects this, if you look at the other sectors, they get affected by the economy, so this gets affected by the economy as well as the weather. So if you have a weak winter, it affects the sales and that is what had happened in the last two years. But now, since the last couple of years, they have also been trying to move out of that and get into cotton fabrics in a large way. But that summer was not very successful, but now, with their revised strategy, I expect that things should fall in place.
They are increasing their institutional sales, increasing their exclusive brand outlet (EBO) footprint, getting into more of sub-brands, ladies and kids wear. So this should really work out well for them because the initial feedback which has come has been quite decent. So looking at an EPS of about Rs 36 for FY19 and about Rs 49 for FY20, it looks very cheap compared to other branded players. So, this is because of history, but it should catch up. So at these levels it looks decently cheap, possibly have a downside of about 5-7 percent which is there with any stock, but looking at a price of about Rs 740 over the next 9-12 months.
Nigel: Sterlite Technologies, that is the one you like?
Irani: Again, consistently positive on this stock and the reason is that one can defend the valuations because the growth is going to keep on coming. I think it is a global leader, number one in telecommunication equipment which includes optic fibre, optic fibre cables, data cables. The company has operations mainly in India, China and Brazil, but has marketing network nearly across the world. Global demand continues to be robust from China which has 55 percent of market globally and also from Europe and US.
The company works on three platforms. Number one is the product, number two is the services and number three is the software vertical. The company, despite having made a lovely capacity expansion does not have any stress in the balance sheet with a debt equity less than 1. The company should be spending at least Rs 10 billion on further expanding capacity over the next 2-3 years and I promise you, I believe that the debt equity will become more comfortable despite spending that kind of money. The earnings this year should be Rs 8-9, but I will not be surprised is these earnings double over the next two years to Rs 17-20 by FY20. I believe that if one tries to look at the traditional EPS manner, Rs 7-8 going at Rs 290, stock looks expensive.
I believe the market will continue to give it a thumbs up which it has given in 2017 because of the growth which this company will report. Also, digital India, the favourite concept of our Prime Minister should bring in more and more orders coming from within the country also. So I think Sterlite is on a good wicket, again the stock, can it correct by 10 percent, who can stop it? You and I cannot stop it. But Rs 250-300, but I believe this stock has the potential to be Rs 450-500 stock over the next 12 months.
Surabhi: Let us come to your last pick, Cineline.
Tulsian: This is purely a real estate company and if I just go through quickly, they have nine cinema halls in Mumbai, Thane and Nasik and all are leased to PVR. So they are getting a fixed annuity income. Apart from that, they have 84,000 sq ft of saleable area booked in Kanakia Wall Street. This is again a commercial complex coming on the Wall Street concept which will get leased out by them maybe for about Rs 15 crore on annuity and the possession should be given to them maybe in the next 12 months or so. Third property which they are owning is a shopping mall in Nagpur which is 90-95 percent occupied.
The intent to monetise and the amount which is estimated to get realised is about Rs 250 crore. In fact, if you see, amongst the realty space, generally either they do not have the earnings or they are overleveraged. But in the case of this company, they have consistent EPS of Rs 4 on an annualised basis and the debt is just Rs 130-140 crore with market cap of Rs 310 crore, EV of about maybe Rs 440-450 crore. And if you take the conservative valuations because as I said, nine cinema halls are all going to get developed maybe every couple of years, one or the other property which will keep giving them the further monetisation of each property as well.
So the net present value of the property insiders or maybe the experts are estimating to be about Rs 1,250-1,300 crore, promoter stake is quite high at 70 percent. So taking all this into consideration, share now ruling at Rs 109 can be looked to have a target of Rs 136 in 2018.
Nigel: Finally the 18th stock is a Nifty stock it did well it was welcomed into the Nifty after that it has not done much?
Diwan: This is UPL, as you said it did well, but it has just come into the Nifty so there is still long way to go. What actually worked against them and which brought the stock down was they had a lot of one of expenditure which came on account of some legal issues battles that they were fighting in Europe on patents and all. But their new product development has been so robust that once the Latin American, North American market takes off for them which they are initial signs of that moving very soon you will see this company getting re-rated very whole heartedly. Whatever has been taken away from it will probably come back to it in a significant way.It is a Nifty stock risk reward is favourable, discount at 16-17 times on FY20 you will still get probably Rs 1,000 as a target which is 50 percent from where it is now. So, I loved the set up. It is a Biocon of 2018. It kind of surprised people because it has not done anything, nobody has bought into it, but great pedigree and great product line as well.The Great Diwali Discount!
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