2014 was a great year for stock picking in the Indian market with the Nifty gaining 30 percent. As market heads into 2015, what are experts recommending, what are the stocks to buy and what should one avoid? In a discussion on CNBC-TV18, Niraj Dalal of 3A Capital Advisors and Manish Bhandari of Vallum Capital share their views on the same.
Below is verbatim transcript of the discussion:
Q: What is the one investment philosophy or maxim that you would want to give to investors for 2015?
Dalal: There are two-three things, one is tough. One thing that you need to look out for is a company which has good management. By a good management I mean a management that understands the business, does not take undue leverage because a lot of good companies have gone down the drain due to undue leverage.
The other thing is opportunity for growth. When you invest in a company you look at the growth. For me if you have these two things then the dynamics fall into place.
Q: Does Cipla fit into that category because that is one stock you have picked for 2015?
Dalal: Actually, for all the three stocks that I picked the key theme, whether it is Dish TV, Cipla or Delta Corp, they have gone through a very strong investment phase. They have all done a lot of capital expenditure (capex). So, whether it was Cipla putting up new facilities, it was Delta putting up the properties in Daman and in Goa and Dish TV the kind of subscriber acquisition that it has done now it is a matter of running the business efficiently. It is about monetising the assets that they have put in place.
It also helps that all the three companies have great management in place, management that has proven its track record over the years. So, that is the recurrent theme and for Cipla, great management, you would never doubt Yusuf Hamied. He has great integrity, great understanding of the market, supreme stuff and of course after the change in management now they have the right kind of people in charge.
In terms of growth you are talking of Cipla having sales of around Rs 10,000 crore. Over the next couple of years it may grow about 40-50 percent. So you are talking of sales of Rs 10,000 crore going to about Rs 14,000-15,000 crore. It is a large cap company with market cap of around Rs 45,000-50,000. Cipla is quite a stable kind of stock that you could recommend to any investor who wants a 35-40 percent Compound Annual Growth Rate (CAGR) over the next couple of years.
Q: Why would you prefer it over Sun, is it because of valuation or do you think they are more than just valuations?
Dalal: Sun has Ranbaxy acquisition on it right now. Of course, fundamentals for Sun are also great but it will take Sun a year or year and half to digest the acquisition, get the economies of scale and all that where you have Cipla which has gone through the investment phase in 2012-13, it is now looking at sales growth. All the inhalers and all will be launched across, the ARV portfolio should be doing well.
The margin should expand from 20-21 percent to about 24-25 percent. When you have a large cap company which grows at about 20-25 percent sales growth with an EBITDA margin increase of 300-400 points over the next couple of years I don’t think you need to look further. The numbers just add up. You are talking of an earnings going from about Rs 16-18 to about Rs 27-28 in the next two-three years, to be that it is just good.
Q: One of the stocks that you have picked out is Shilpa Medicare in the oncology business. An article in Outlook that featured you said that since listing this stock has compounded shareholder wealth by 46 percent every year. However, we generally notice as they say catch them young and watch them grow. In the first 6-7 years you get the maximum returns and post that stock starts to compound about 15-20 percent. At what phase do you think this stock is in and what kind of returns would you expect for the next couple of years?
Bhandari: It is true that against a BSE Sensex of 13-14 percent this has compounded significantly. We are talking about the compounded average. So, there are lean periods where this stock would have remained where it has. So, you are looking at the trend between the two data points.
The market cap of Shilpa Medicare is close to Rs 2000 crore today. Market cap relative to the size of opportunity they have in the global oncology research - CRAM space is significantly high. So, this would have said very well about Divi's or any other CRAMs business.
As long as you can deliver a superior value to the customers on the global pool and the pool of the profit is significantly higher is where the valuation would get built in and the earnings would get built over a period of time. Having said that, I don’t see that the story has yet started and I see a very long journey for a very good and stable management. They are sitting in a very small place like Raichur in Karnataka. So, it is not so easy to build these kinds of very high IPR businesses.
Definitely, the management has significant advantage and edge on their side.
Q: What was the size of the universe you looked at before zoning in on these shares? How many companies would you have looked at before coming here?
Bhandari: In our investing horizon we look at companies which has got Rs 500 crore and above sales. In my personal experience that is where I think there is enough cash flow which could be reinvested in the business and can create a size for the shareholder like us that company to become attractive enough. We would have looked at may be, at any point of time we would look at close to 200-300 companies in this space.
_PAGEBREAK_
Q: You have picked up Dish TV which is a market leader in its segment. What would be the next trigger for Dish TV? We have been talking about digitisation for a while but how much of that is already in the price, what do the next couple of years look like?
Dalal: We have done two phases of digitisation. Now December 2016 is the deadline for digitisation. We are talking about 1.2 crore subscribers that Dish TV has now. If you talk about the opportunity they have been adding about a lakh subscribers per month, which is an average run rate for last six months.
If you look at the opportunity the only listed player is Dish TV. You also have Tata Sky, Videocon and all the others but eventually it will be a two-player market. Dish TV has acquired the mass, it doesn’t need to add more than – if it had about 2 crore subscribers in the next may be 3-4 years I think that is great.
What you need to look at is that this is a perpetuity business model. Once you have a cable connection in your house you don’t end up withdrawing it or removing it.
The ARPU that Dish TV generates right now is about Rs 170-180. Any of your cable TV connections if you go home you don’t pay less than Rs 300-350 minimum. So, the ARPU can only go up.
If you start looking at the numbers the way they are, you are talking of 1.2 crore kind of subscriber base with Rs 300 of ARPU, you are talking of about Rs 350-400 crore per month. That translates to about Rs 4000 crore per year. That to me is enough size for a company to generate significant cash flows. It has done all the hard work till now. With a run rate of 1-1.5 lakh per month it should reach about 2 crore in the next 3-4 years.
Q: Can technology disrupt this apart from Tata Sky and if any 4G player gets in is there a black swan there for that?
Dalal: Once you are in the house it is very difficult to be uprooted unless you do something catastrophically wrong. I have three cable connections in my house, I haven’t changed anyone and I do not intend to do that.
In terms of the opportunity a lot of digitisation will now happen in the tier II towns and all of those places. Putting physical wire there is difficult. Dish TV specialises in the rural, semi-urban areas. So, the opportunity for Dish TV as compared to other players is far higher.
Q: There is something that is bogging the stock down. It has not performed this year. It is up only 10 percent though the market is up 30 percent. Why do you think that is the case?
Dalal: The stock has not performed for the last 3-4 years. It is a rank underperformer. They are getting their act together now. There comes a point in a business when it reaches an inflection point, I think Dish TV is there.
If you just do basic numbers it is impossible for Dish TV not to breakeven and start generating cash flows in the coming year. Once that starts happening, it has not happened till now, it has always disappointed on the results front.
If you are an investor that is a great time to buy a stock as long as you believe in the fundamentals of the company. I think the fundamentals are there for anybody to see, anybody who has a calculator to do math will be able to make the numbers for Dish TV.
Q: You have picked Pennar Industries. What is the story there and what kind of compounded growth are you looking at?
Bhandari: We are very bullish on the industrial recovery and that would drive lot of companies and lot of growth in lot of companies. This has also to do with the stable government and Narendra Modi's personal agenda in terms of putting up the whole capex plan back into the rolling.
One thing which is common in the macro theme is that you have lot of operating leverage sitting in lot of these companies. What operating leverage would mean is that you could generate a significant higher amount of sales with very low capex and that is what an equity investor would love or shareholder would love.
What is interesting about this company is that you have a company 6-7 years back used to be a small mid sized steel producer and last 6-7 years of downturn has taught them significantly how to make themselves a steel converter to a very significantly high value add steel products which includes the hydraulics, which include the railways.
They are one of the significant suppliers for products to railways to creating a complete new business out of steel to called PEBs which is pre engineering building.
So, today if you look at USA 70-80 percent of USA is built on PEBs. So, you don’t build a concrete, you build PEBs-based businesses, PEB-based industrial infrastructure and everything which is a superior technology. So, this is the ability of the management to create a new vertical within itself.
They are not just another steel player who has just been waiting around for a turnaround. They have created the new zones and profits areas and verticals which speaks highly about the quality of the management. There is also lot of credit with the second generation of management which has joined 8-9 years back and it has created this.
So, we are looking at a situation where it is really difficult to see the compounding of the earnings because if the IIP grows at 8 or 9 percent these companies will do very well. So, Rs 1200-1300 crore topline company can achieve Rs 3000-3500 crore sales with a mere investment of Rs 50 crore per annum.
Sonia: This whole gaming business has not perhaps found the fancy of so many investors but do you see a lot of potential in that stock?
Dalal: The model is proven in Goa. They already have 2,000 gaming positions in Goa. They have about 1,200 which will go live as and when they get the license for Daman. On your channel they flashed a couple of weeks back that they are planning to sell their stake in Advani Hotels and all. The management has now focussed on the core business everything else is out of the way. You are looking at gaming positions doubling in a couple of years. The license may come next month, it may come in a year, whenever that happens.
So the EBITDA margin in the gaming business is very high. It is always loaded in the favour of the house. So, if you were to run or look at the business a 27-28 percent margin can easily shoot up to 40-45 percent when the additional gaming positions come into play. They have gaming revenues about Rs 250-300 crore about last year. You are looking at that number going to Rs 500 crore the moment you have a full year of operation for Daman. And casinos everywhere else are basically cash generators. Huge amount of cash flows. Once they are stable and keep running. You can always have ups and downs in the business which happens in Macau or anywhere else in the world.
Sonia: Yes, like Goa rejected the permit for the gaming business a while back and that brought down the stock quite a bit.
Dalal: So, the one big issue with Delta which everyone has to be aware of is the legal or regulatory environment. Having said that you already have the model established, I would be surprised if something untoward happens on that front. For Goa when mining went away casinos were the biggest revenue generators for the state. So, it is a vice, let us accept it is a vice, but it is an accepted vice. To my mind you are looking a company which is going to have significant cash flows.
Sonia: As we speak the gaming business is like in full swing right now.
Dalal: Yes, it is in full swing right now.
Senthil: Some people we have had in the channel are saying after the fantastic performance of equities in 2014, 2015 may not really be a year where equity will do so well or in fact some people say it may underperform other asset classes. Where are you on that?
Bhandari: First we need to define those asset classes. Are we talking about relative to the bonds, we are talking about relative to the real estate, we are talking about related to gold, equity has the best chance to show up its hands apart from a bond. Bond would have a rally we have seen a rate cut. some rally has already been priced in, but if you ask me one year is too short a period in equity. When we have pension funds look at participants of equity today in India, 44 percent of the free float owned by FIIs. So who are these? These guys are not making one year investment. These are the guys who bought each and every year and out priced Indians.
So, we are not talking about a one year view for equity and no one have any signs, you could have a sideways market but then suddenly the bunching up happens. So equity shows up one of the best asset class today to own in Indian equity and with all the macro events which is in favour of India we are in a very good situation.
Disclosures:
Niraj Dalal I hold all the 3 stocks recommended and have advised them to clients.
Manish Bhandari I hold all the 3 stocks recommended and have advised them to clients
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
