Watch the interview of Aashish Tater of fortunewizard.com with Latha Venkatesh and Sonia Shenoy on CNBC-TV18, in which he shared his reading and outlook on market and specific stocks.
Below is the transcript of the interview.
Sonia: You track some of these JP Group companies, JP Associates as well, what have you made of the fall that we saw yesterday and how do you approach the stock now?
A: In our report, we said that good valuations will become richer, poor guys will become poorer. That was the theme that we were talking about for the Bull Run and this continues to be the case.
Last year we recommended Century Textiles as multibagger and we said sell JP Associates and switch to Century Textiles. Century Textiles doubled and at the same time at Rs 70 JP Associates has dwindled to Rs 13.
The basic problem with JP group or any company with the debt bomb –whenever there is a debt service of almost one times of what your EBITDA is or more than that eventually this leads to higher debt and that leads to higher interest cost and eventually the company goes into doldrums. This has been the case in the past and this is exactly what has been done over here.
If you see JP selling its silver to cover up the debt bomb but that will be only beneficial to the debt holders, what about the equity holders? If you take the rough math – last year they did – on a consolidated basis, I am talking about the JP Associates part, Rs 20,000 crore of sales and they did EBITDA profit before interest in taxes close to around Rs 4,400 crore and that debt service cost was Rs 200 crore. So if you adjust that they earn 1.5 times.
Even if they reduce this debt because of the passage of time, the interest burden has again recoupled and what will happen is that the silver has gone from your hands, these are assets which were generating positive cash compared to ideal capacities, that ideal capacities will be there, you can talk in terms of consolidated basis that yes, it is sitting on these much capacity and this should be the valuation but that capacity is not generating any free cash flows.
On the other hand, all the good cash flows have already been factored in. So this is going to create a problem for JP that is what we feel even going further.
Latha: Would there be any other companies that you think will be unable to find enough EBITDA to pay interest?
A: When Pipavav was taken over by Reliance Infrastructure, we felt that Reliance Infra will again be into doldrums and we do not see that debt kind of problem for Anil Dhirubhai Ambani Group (ADAG) as a whole but we feel this will subtle profit and they will be eventually into a phase where their growth will not be able to justify with these additional burden on their assets. So there is another problem that is going to happen over there. The third interesting thing we feel is that Adani Enterprise though it has gone for restructuring – the real gem has been the Adani Port, the Mundra Port SEZ.
Apart from that particular asset, we don’t think Adani Enterprise or even Adani Power will be able to match up to the expectation because the free cash flow generation to the interest cost burden and the recoupling of the effect will be very big compared to what they can generate in terms of free cash flow. So if I consider debt plus equity service cost even at 8 percent or 9 percent, I don’t think they will be able to justify even their current marketcap.
Latha: You are expecting more problems for these debt-laden companies, only increasing problems?
A: If you see what we were telling that good companies will get richer, companies with low debt profile, with brands and equity that will be exactly the theme even going further.
Last year we recommended Saint Gobain at Rs 13, it is Rs 39. We still feel it has got huge potential of re-rating. Similarly, if you own something like Unitech or JP Associates, take an example of Shree Digvijay Cement, it is trading at Rs 15-16, it is available at USD 25 and it is a Brazilian giant’s baby, Votorantim Cimentos, which is basically a Brazilian giant and it is trading at USD 25. Get me a single cement company which is trading in the zone of USD 25-30 in the cement space with almost zero debt.
Sonia: You track Nestle closely. This one has been a great wealth creator in the last many years but now of course because of Maggi it is under quite a bit of pressure, what do you advise on this stock?
A: If you see the valuation aspect, there has been a huge wealth creation for Nestle already happened but what we suggest is the chance of disappointment at current context, it is better to stay away from this stock and switch to something like Britannia because there is lot of value in that particular space and we feel such problems will not come in over there. Even if I don’t see a 10 percent growth for Nestle this year because of all its problems, they will be doing Rs 1,200 crore of profit after tax (PAT) against the marketcap of Rs 55,000 crore.
So there is lot of potential for switchers and look for good value in a similar brand situation and once thing is clarified, it is better to buy something at an expensive valuation rather than looking at 30-40 percent discount after the event has not happened or passed through.
Disclosures
I do not own any of these stocks but as part of our policy, we have recommended these stocks to our clients. We have recommended similar strategies to our clients so it is safe to assume that we have vested interest from that perspective but at personal level I do not own any of the stocks.
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