Why Kotak Securities likes Allcargo, Insecticides India

With expectations riding on the GST Bill being passed, logistics stocks have gained momentum in the trade, said Dipen Shah, a senior VP & head-PCG Research at Kotak Securities. Shah is bullish on Allcargo Logistics due to its significant position in the multi-modal transport segment both in the domestic and international market by virtue of EQL acquisition that the company had done few years ago.   He added that Allcargo will be the biggest beneficiary of trade recovery and the GST Bill and will see an upside of 20 percent in the stock valuation.   He expects decent growth for other logistics companies as well. Shah is also positive on Insecticides India if the monsoon play turns out to be good. He expects significant growth in the revenue without any capex, and the return on earnings (RoE) to gradually move up.  He also recommends Voltas and Blue Star. 

Below is the verbatim transcript of Dipen Shah's interview with Reema Tendulkar & Mangalam Maloo on CNBC-TV18.Mangalam: Your recommendation is Allcargo Logistics. Why Allcargo and not other logistics stocks?A: Goods and services tax (GST) is in the offing and we are also expecting GST to get passed in the monsoon session. Logistics stocks will be in favour. We have picked up Allcargo because of its significantly better position in the multimodal transport operation segment both in the domestic market as well as in the international market by virtue of ECU Line acquisition which it did a few years back. It is a second largest player in the area of operation and also in the multimodal transport Operations (MTO) segment. As I said it's a significant player in the domestic market as well as internationally. We do expect significant growth for all the logistics companies, so the lower than cargo load where Allcargo is the second largest player is expected to benefit because of whatever happens in the economy as well as GST and valuations are not that expensive. We are expecting 20 percent upside for Allcargo. It has good, stable and strong management, so we are bullish on the stock.Reema: Is Insecticides India a monsoon play and if yes, how much of a good news is already priced in into the stock on the back of a better performance, financial performance due to a normal monsoon because we have been talking about this monsoon trigger for a month now?A: We have picked up Insecticides India partly because of monsoon play. A normal monsoon bodes very well for all the agrochemical companies including Insecticides India. The stock has not been doing well. It has been an underperformer over the past couple of years because of mistimed capex which the company had done. So it started off with big capex a couple of years back and then there were two years of subpar monsoon which impacted the financials of the company. However, going ahead we believe this is a factor which will play to the company's advantage. The company is operating at very low utilisation levels of 36-37 percent and in the next couple of years it can grow significantly without any additional capex.The company has also moved up the value chain in terms of trading of generics to now moving on to branded play and also on the in licensing theme. So, we believe the company will report additional or improvement in margins going ahead and with monsoons being good, we also expect a significant growth in the revenue without any capex from the company side. So we do expect the return on equity (RoE) for Insecticides India to slowly move up to about 17-18 percent range and at about 10-11 times FY18 earnings, we believe that there is a significant potential for appreciation in Insecticides India. So that is the reason why we are recommending the stock and we are also very positive on the management of the company. Mangalam: Voltas India - a key trigger that you had mentioned was that the summer season which had gone by, was pretty strong but today we have got the cabinet committee approving the recommendations of the Seventh Pay Commission. How much more of an upside in terms of sales can you expect on account of this for Voltas and what is your view on the stock?A: We have been recommending Voltas for quite some time, both Voltas and Blue Star. The stocks have partly moved up largely in anticipation of the Seventh Pay Commission recommendations and also because of the summer season which has happened. As of now we are seeing slightly limited upside on the stock of Voltas but we believe that if we have to look at the Seventh Pay Commission recommendation impacting the consumer durable sector then Voltas by virtue of being the largest and the top player in the air conditioning segment is expected to benefit. The company is also doing very well in the projects business largely in the Middle East where it is one of the leading player and we are seeing growth coming to that segment also. So, on both the fronts we are pretty positive on Voltas. The stock has recently moved up quite a bit, so we would recommend the stock at slighter decline but it would be among the best picks for us if we have to look at the overall consumer durable segment going ahead.Reema: Castrol India has given negative returns in the last one year. It has fallen close to about 15 percent. What is different for Castrol this year and what will be the upside that you see?A: You are right that Castrol has not done well but what is important and what we have liked in the stock is that in the Q1 number or the last quarter numbers which have come, Castrol has reported 8.7 percent growth on year-on-year as well as quarter-on-quarter basis and this is the first time in the last five-six years that Castrol has reported such kind of a volume growth.However, Castrol reported this growth largely because of restructuring which it has taken up. It has now expanded its distribution reach, it is introducing new products and new technologies and that is the reason why we are seeing this kind of a growth which is almost 24-25 quarter high. The company also has strong management and also a 3-4 percent dividend yield. So we believe that going ahead because of whatever initiatives Castrol has taken, the growth rate should continue to be better as compared to what they were in the past several years. We have about 15-20 percent upside still left in the stock and that is why we are positive on Castrol.