Bhavin Shah, CEO, Equirus Securities talks about why TCS is his preferred pick. He also talks about the companies he is betting on in the pharma, infrastructure and banking space, among others.
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Below is the verbatim transcript of Bhavin Shah's interview on CNBC-TV18
Q: Let us start with the first of your picks, Tata Consultancy Services (TCS). It has been a stellar performer in 2013 itself, you think it can continue; it has not worn out?
A: It is very richly valued by historical standards. However, what we are seeing is very strong demand environment in which TCS is the best positioned company today. They have very strong momentum with clients, especially with large clients. They are offering in terms of capabilities, in terms of breadth and depth definitely now puts them right at the top. As a result, if you look at the recent data points they have sort of gone ahead of their FY14 hiring targets already and then completed that by December which suggests that they are looking at a very strong year ahead. We also think that TCS if there has been one issue for us with TCS that has been their working capital. It has been a little bit on a high side and we understand that the company is also working to address that. So, that will improve free cash flows further. So, we think that from these levels taking a March 2015 view TCS can still move up to something close to Rs 2600 which suggests a decent upside from current levels and that is why we are recommending TCS.
Q: What about Sun Pharma?
A: We are picking pharma sector broadly again. The stocks have done very well. However, we believe that market is kind of under estimating some of the opportunities that Sun Pharma has in front of it especially with drugs like Lupron Depot and Glivec with 180 day exclusivity. Then Taro business has very strong potential. So, we think that high teens, organic earnings growth is quite possible with Sun Pharma. So, again looking at March 2015 we are looking at target price of Rs 715 at 23x of trailing earnings.
Q: We will get to the financial space, you like City Union Bank; smaller bank how much more of an upside would you see possibly going into 2014 on that?
A: We are looking at pretty strong upside. We are looking at the stock easily crossing Rs 70 as market moves beyond asset quality concerns across the board. City Union Bank has had a very good performance on that front with very controlled quality deterioration. They have maintained very strong interest margins and also with sufficient capital they don’t need to dilute for another two to three years. So, we think that City Union Bank should be a good pick in the banking space.
Q: Let me come to infrastructure companies. That is a place which is full of so many land mines but you have Ashoka Buildcon over there, what makes this one special?
A: We have done a lot of work on the road sector in terms of the companies in that space. We believe that two companies, Ashoka Buildcon and Sadbhav Engineering have had very careful approach to selecting projects and also very good track record in completing them. Ashoka Buildcon has a very good mix of completed projects plus a couple of BOT projects becoming operational soon and that will support healthy cashflow. The cash position will allow them to re-enter bidding whenever they see the opportunity. They have been very careful not to get involved in aggressive bidding that was going on in the sector. The margins are pretty good as well and when we value the company based on their entire portfolio projects we see decent upside in the stock. That is why we are looking at Rs 77 as a fair value and that suggests a good upside from here as well.
Q: Quickly in a short summary Finolex Industries?
A: We today initiated coverage of Finolex Industries. It is the largest player in the pipe segment. However, the company has had a volatile earnings history because of number of factors that affect their earnings. We believe that they have taken steps such as hedging their input cost which are input raw material which are imported. With an increasing volume of pipes and less of PVC sell through in the market they should be able to at least reduce some of the volatility in their margins. Free cash flow generation of this company has been very good. Some of the other stocks in the sector have done significantly well and we think that Finloex exhibits lower volatility in earnings and healthy growth in high teens the stock could give you upside both from multiple re-rating as well as growth. That is why we are recommending Finolex Industries. Also, very good dividend payout which is one of the key reasons why we like the stock.
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