Predicting the market movement in the short-term is always a challenge and dicey, says Dipen Sheth, head of institutional research at HDFC Securities. But on the brighter side, he says big money has started flowing into domestic mutual funds, which should mitigate if not manage a large exit, should it happen for a while with the FIIs. He is constructive on the market.
He says in the energy space, Suzlon has systematically destroyed shareholder wealth. "There is a significant shift in promoter DNA for Suzlon," he told CNBC-TV18. However, he adds that Dilip Shanghvi investing USD 300 million is a positive for the company and also the government focusing on wind energy will boost its performance.
He advises investors to buy MCX with a target price of Rs 1180 per share as the MCX business could see a big surprise. He believes players in the defence sector such as BEL and Pipavav Defence could grow 5-6x in the next 2-3 years.
Below is the verbatim transcript of Dipen Sheth's interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy
Latha: What is the market looking like? There is a dash of pre-Budget rally still unfolding you think?
A: The disclaimer here is that short term is always very dicey to predict. The momentum is on our side, surely on the side of the bulls. Valuations are now looking a little, if not stretched at least adequate. There is hopefully a lot of new initiatives and actions to be taken in the Budget which should set direction for the next few months but there is a storm brewing in Europe, there is all kinds of funny macroeconomic developments and geo-political developments happening around the world. So, you might see a little bit of money being pulled out.
Foreign Institutional Investors (FIIs) own a huge chunk of Indian equities and every time they are net sellers for an extended period you could have a problem. The good news is that big money has started flowing into domestic mutual funds and that should mitigate if not manage a large exit, should it happen for a while with the FIIs. I am constructive. So there is also this side theory that the 3Q numbers have been uninspiring and there is an year-on-year (YoY) decline and at the aggregate level people put together performances of companies. It is not important where you are, it is very important where you are going especially when where you are going has been so brilliantly redefined. So, I am not too worried about the 3Q let off.
Sonia: Let us talk about some of the stocks you have picked up. The most interesting one is Suzlon. There has been a crisis of confidence in this stock for very long but now with such a credible investor coming in would you recommend the stock for a long term investor because this is something that has resulted in lot of wealth destruction over the last many years?
A: Suzlon has, if I may say so, at the risk of sounding like a bear on Suzlon – it has systematically destroyed shareholder wealth in the last few years by systematically destroying its core business through a series of reckless decisions and bad capital allocation and a good acquisition which got messed up because of the covenants around that acquisition, huge overleveraging of balance sheet and making that acquisition and not being able to integrate that acquisition which is REpower or Senvion as it is now being called.
A lot of these excesses and old sins are now being progressively washed away. So, there was a time when nothing was going right for Suzlon and it looks like everything is now going right and nothing can go wrong for them. So we have come a full circle. There has been a diametric and radical shift in the business prospects in the balance sheet and indeed in the promoter DNA. So while one has the highest regard for the dynamism and growth appetite that Mr Tanti had shown for all these years the fact is that he overleveraged the balance sheet and it looked like, in retrospective, with the wisdom of hindsight we could say that he went overboard in leveraging the company and with his global ambitions.
To my mind it looks like the Dilip Shanghvi family and associates coming into an Rs 1,800 crore odd infusion that is close to about USD 300 million is not only going to bring in money and deleverage the balance sheet substantially. You have got Rs 7,000 crore of deleveraging happening with the Senvion divestment but most important we are in the midst of a DNA change in the way the company is run. So, it has got a huge fixed cost structure. It has got regulatory headwinds that it ran into over the last few years when accelerated depreciation and green benefits were withdrawn and everything is now coming right for them. So the new government is saying we need to increase installations of wind power especially, so renewable energy and in particular wind power.
So, Dilip Shanghvi walks in and says listen we won’t only do wind, we will also do solar. Can they do solar, have they ever done solar in the past, no, but there is some element of faith in the new promoter associated who has come in. This is the time not to look at the immediate numbers of Suzlon, it is a little bit like India, we were messing up big time and then suddenly I have this big iconic leader in charge and I hate to draw parallels but is Dilip Sanghvi the Narendra Modi for Suzlon, it sounds a little outrageous to make this kind of (interrupted...)
Latha: No, it is not like that, Tech Mahindra to go with Satyam, I can’t even remember it…
A: Exactly, and now the government is saying we need to increase wind power installations in the country. Suzlon’s domestic sales were less than 1,000 megawatts. So I am saying at 1,100 megawatts it can break even and what if Mr Sanghvi gets a fix on fixed costs and brings them down further. At 1,400-1,500 megawatts of annual volumes, Suzlon will be a money making machine and then paying down debt, adding to market cap all those beautiful things will happen over a period of time.
Latha: Actually he has given credit enhancement for working capital loans, which means immediately they are getting working capital, and who would not trust Dilip Shanghvi’s word. I take your point.
A: Absolutely, it is dramatic healing and that healing is now backed with whole lot of steroids.
Latha: So, Suzlon is your first stock. The other stock you have for us is MCX, why?
A: Again MCX is a company which at one point of time was going through a severe perception issues. It is in a wonderful business. We will come to that in a minute but on perception, it was part of the FDIL group and after the NSEL blow up there was a complete breakdown of faith in the group and beautifully enough the FMC stepped in and ring fenced this business because of the strategic and national importance that it had.
I repeat this, it has a national importance as a commodities bourse, it has a national importance which is unparalleled with that 80-85 percent market share even in total commodities, futures trading in the country. So, this company was ring fenced from any unmanageable fallout of the NSEL fiasco. It was promoted by the same people, so they were forced to exit over a period of time and as in Suzlon’s case suddenly there was a change in the DNA or at least the perceived DNA of the company when Kotak Bank picked up a 15 percent stake, not to mention other signature shareholders who got into the stock at various points of time.
It is also very important that the operations of the exchange were not affected during this meltdown given the fact that software engine was provided by FDIL, given the fact that there was a big perception issue around what would happen to outstanding trades on this exchange. It went on, business went on smoothly as if no promoter change happened. In fact the promoter change helped to inspire people to stay on with their exposures in the exchange and continued to trade. So, that transition was well taken care of.
Latha: What are the price targets for both, first MCX and then Suzlon?
A: We don’t have Suzlon under coverage right now. It is difficult to model the company right now because post the Senvion divestment, we will have to take a look at the balance sheet. So I suspect after Rs 6,000-7,000 crore write down that they took on Senvion, you will probably have to look at networth completely differently now. So a little bit of modelling issue does persist there. Also remember that Senvion also had its step-down subsidies arena after this divestment, I dare say Suzlon will have 20-30 subsidiaries which will have to be incorporated in their financials, so it is a little difficult to get a fix on that monster.
On MCX, I think the price target that we have published - we have them under coverage, we initiated on them recently and they declared their numbers last Friday as well. I think the price target is less important, what is important here is that you appreciate certain fundamental characteristics of this business as it exists now. So one, there is non-linearity. The size of the business can be a multiple fold from where it is today. There aren’t too many businesses in India, which can become 10-20 times from where they are today in the foreseeable future. So telecom was like that at one point of time, software was like that at one point of time and so on and so forth.
Sonia: Talking about some of these potential businesses as we speak Prime Minister Modi is addressing the media at the Aero Show in Bengaluru and he is talking about doubling output in defence manufacturing. Any defence stocks that you would look at?
A: All the guys who have a finger in the defence pie are very interesting and if you look at their numbers you can’t do a spreadsheet kind of investing here. You can’t analyse their current profit rates or assume a 10-20 percent growth rate and look at what kind of forward multiples they are trading for. Remember these are not secular businesses, these are deep cyclicals and in fact there is a structural shift which is being unleashed right now.
So, if you look at Bharat Electronics again we don’t have them under coverage, if you look at an Astra Micro or something like that, Pipavav Defence. These businesses can grow 5x, 6x in the next two or three years if things play out to their advantage. We don’t understand these businesses which is why we don’t have them under coverage but I would take the point that we really need to dig very deep into some of these.
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