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Last Updated : Jul 17, 2015 06:04 PM IST | Source: CNBC-TV18

Corp earnings to stabalise mkt in 3-4 quarters: 3A Capital

In an interview with CNBC-TV18, Niraj Dalal of 3A Capital Advisors believes that in next three to four quarters market will stabalise with better corporate earnings.

Niraj Dalal of 3A Capital Advisors believes that stocks will stabalise with better earnings in next three to four quarters.

In the pharmaceautical sector, Dalal is bullish on Cipla, which has been fluctuating due to changes in the management. Dish TV will rise steadily in next three to four years, he says. 

Tata Global has been fluctuating for some time and the management needs to focus on return on capital employed (ROCE) and profitable growth. However, it will take around 6-12 months for it to stabilises, he says.


In the textile sector, he is positive on stocks like Himatsingka and Kitex on back of good management and reasonable balance sheet. He expects Kitex to increase with expectation of 25-30 percent growth in its compounded annual growth rate (CAGR) earnings over two to three years. Even with low growth rate, he says it will give steady returns.

Talking about the gaming company, Delta Corp, he says though the company has all its strategies and earnings in line, the stock hasn’t reached top levels yet. Once the company gets its license approval, the stock will improve, he says.

Below is the transcript of Niraj Dalal’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: We have already seen Dish TV do very well in the past few weeks. Is that a stock you would recommend?

A: Once you identify a good stock and if the fundamentals are falling into place, the earnings are in place. There is no reason not to buy the stock. So, whether you have bought it at Rs 70, whether you have bought it at Rs 100 or at Rs 110, Dish TV is a stock which for me over the next three to four years should be substantially higher than where it is trading today. No reason not to own it; not to buy it.

Latha: Because you have recommended it before, I started with that one just to ask you whether people should be still sticking to the stock. One of the adages in the market is that people don’t like to see their own profits, they go and book it but in this case you would want them to stay on for the long haul?

A: It is very difficult to identify a stock which has the makings of a multi-bagger. Once you have identified that and the thesis falls into place, the way to make serious money is to ride through that and I genuinely believe that Dish TV offers a potential.

Sonia: Yes, this is a stock which you have backed for a while and has given really good returns. The other stock that you have picked out for us is Cipla. Now, over there is so much management changes that you have seen in the past couple of weeks and months - the successor in waiting Kamil Hamied has stepped down. Now, Samina Vazirali has taken over, so the stock has not moved much perhaps because of these worries. Would these management changes worry you at all or do you think that the long-term prospects are intact?

A: Changes like this can hold the stock back for a while. The stock will move up once the earnings start coming in. I am reasonably certain that over the next three-four quarters the earnings will stabilize at a much higher level than what they are today.

Again the reason for Cipla and we have discussed this before - is that it is a company that the capex cycle is done, the earning should now come through. Last quarter was not so good, so clearly there has been some stalling of the stock in between the Rs 600 and 700 levels but to my mind it is a great stock to own. Again with two-three year’s timeframe, great earnings visibility and yes, a little bit of uncertainly on the management, but not something that will change things dramatically.

Latha: I wasn’t really dying to start with Dish TV, I wanted to actually start with your two textile stocks simply, because that has been the flavor of the month as it were and these are reaching out to stratospheric levels. Let me start with Himatsingka side, when it reached 100, it looked like it had reached its, say, technical level is what some people had told us because it had turned away from that level previous times but this is just gone and on now at 120, is this going to be one of those multi-baggers and why?

A: Every time you buy a stock, the expectation or the hope is that it will deliver good returns. So, the thesis for Himatsingka is very simple - it is about 9.5 crore shares with a book value of about Rs 80 and about Rs 1,100 -1,200 crore of sales and making a profit of Rs 100 crore.

Now a lot of its business is in the US, so you are looking at a stock in the textile sector, which is available at 11-12 times historical earnings with great sales growth potential and margin improvement possibilities. So, if and given the way the whole sector in terms of textiles whether it is a Kitex or Verma or some of the other stocks have performed there is no reason for this not to be going higher, but it is still early.

As a lot of people who were skeptical, Rs 100 was an important level –I don’t look at all those levels, but to me I am looking at if the stock is able to generate Rs 20-25 earnings over the next two three years, then it is not going to trade at Rs 100. So, to my mind it is an easy bet.

Latha: What about Kitex? Kitex, a proverbial March 4 date when the Nifty touched 9,000 was Rs 500. Now it is Rs 1,000 and Nifty is still struggling to get back over there. Anything recently that has happened in the stock that we should take note off?

A: Nothing recently. The numbers have come as per above expectations. But, this is the fun about picking this stock early. You get lucky sometimes. I was lucky with Kitex. I will be honest, at Rs 250-300 when I bought it, I was not expecting it to go to Rs 1,000 in such a short span of time.

Again, the logic then was same – a good company, well managed, doing the right things, earnings will come through. One thing which I would like to reiterate in this market is if the earnings have come through, the stocks have reached significantly higher levels than when they started out.

So, if you are able to identify a stock which has good management, reasonably stable balance sheet and earnings potential, the market has rewarded you. So, again, Kitex is something that I hold now, but to buy at Rs 1,000, I am not so sure.

Sonia: I have a follow-up on that because when Kitex was at about Rs 300-400, a lot of people expected it to replicate the success of page industries, its peer in that group, which it did successfully. But, now that a lot of the story has played out, from here on what kind of expectations do you have for Kitex considering that it does. It is one of the major suppliers to the biggest brands in the country. So, whether it is Mothercare, Jockey, even some of the global brands, do you think Kitex still has the potential to grow at this pace?

A: I would love if Kitex grows at the pace it has grown in the last year. But to be realistic, if Kitex has 25-30 percent earnings growth over the next 2-3 years, I will take it. I will be happy. There was a time when the base was lower. I do not think that is the case any longer. So, 25-30 percent earnings compounded annual growth rate (CAGR) over the next 2-3 years, if they are able to manage that, sure, Kitex will be much higher than where it is today.

And on the lower side, I do not think it is going to do anything lower than 15-18 percent of earnings growth. So, even if that be the case, I will get my steady returns. So, I think Kitex now moves into that zone where if you own it, stick with it, it will give you good returns over the next couple of years.

Latha: Let me ask you then the ‘ulta’ stock – Tata Global. That is actually failed to perform. I remember it at Rs 170 about a year back or thereabouts. Since it has gone wrong for some people who may have bought it at those levels, what is the courage that you have to buy it now? Are you recommending it as a buy?

A: It has not gone wrong for some of the people. It has gone wrong for most of the people including me. I am being very honest. I have been a strong believer in the brands business. I have been a strong believer in the Starbucks concept; everything seems to be in place for this stock except that the price does not up.

So, you do not have a stock which is available at one time market capital to sale in the entire fast-moving consumer goods (FMCG) space. So, this is available at one time market cap to sales. But, anybody who wants to argue the logic and say that it has been available at that market cap for the last two years. So, what is going to change?

I mean, we were there at the analyst meet after the results and there was huge desperation amongst the investors. I think the management realises that they need to focus on the return on capital employed (ROCE), they need to focus on profitable growth. See, they have gone ahead and invested small amounts in various countries.

They have realised that that has not worked. They have had to take write-offs; their base business is doing very well. The Starbucks business is doing very well. If they are able to increase their margins by about 200-300 basis points by just focusing on the core business and improving their existing business, the stock will get some traction.

And then I think again it is going to take time. If you remember about 3-4 years back, Hindustan Unilever spent about three years in the range between Rs 200 and Rs 300. I am very hopeful that Tata Global will do a lever in the next 6-12 months sometime.

Sonia: You have been very patient with Dish TV as well and finally in the last one year, that has yielded some results. So, hopefully this will as well. But I just wanted to get one final word from you on Delta Corp. That is another stock that not too many people have faith in, perhaps because of the industry it is in and also the stock has not done anything. This year it is down about 10 odd percent in such a booming market. You would still put your hopes on Delta Corp?

A: Oh yes. Again, Delta Corp is another stock, which the gestation period has been pretty long, the company has been doing all the right things, this quarter results were more or less in line, expectations were about Rs 75 crore of gaming revenue.

They did about Rs 81 crore. So, the numbers are coming for Delta, but the triggers in Delta are very different. Realistically speaking, it is the Daman Casino, it is the reduction of their debt, it is them selling off their non-core businesses and they are doing all of this. I mean the strategy has to fall in place. The biggest trigger is the Daman licence. Once that comes in, then you are looking at significantly higher cash flows than what they have right now.

And let me just remind you once again, that the earnings before interest, taxes, depreciation and amortization (EBITDA) margins in the gaming business are just fantastic. So, if you are talking of sales doubling over the next two years, this talk will be in a very different zone and that is the bet. But, again, the caveat is that has been the bet for the last year. So, it all depends on them getting the licence and hopefully at some point that comes through.

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First Published on Jul 17, 2015 06:04 pm
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