HDFC Sec's 3 bets: Navneet, Birla Corp, OCB

Dipen Sheth, head-institutional research, HDFC Securities picked three stocks that could give good returns. In an interview to CNBC-TV18, Sheth names Navneet Publications, Birla Corporation and  Oriental Bank of Commerce as his picks and gives reasons why he is bullish on them.

Below is the edited transcript of Sheth's interview to CNBC-TV18. Q: We have not talked about Navneet Publications in a long time. Why are you are positive on it and what kind of price target do you see on Navneet Publications?
A: Navneet Publications is a very good example of a company with an excellent franchise in the area it works in- publishing, education, supplementary books. And it has a footprint in Maharashtra and Gujarat where it has an unbeatable position. Close to about 60 percent or maybe two-thirds of the market is Navneet Publications. Its return ratios, margins are very good. The company’s Rs 1,500 crore market cap is slated to double profits in about three years to FY15.
The company is expected to give 25 percent return on equity (RoE), 25-26 percent EBITDA margins and this is available for about 10 times FY15 with a 3 percent dividend yield. It has got everything going for it. It has 62 percent promoter holding and I think this is a very decent valuation to buy into the stock. Q: What kind of price could it go up to on the valuation chart you think?
A: If one looks at a P/E rerating as a possibility, it has not happened in a while for Navneet because for the last two-three years, the stock went nowhere simply because there was no syllabus change playing out in Gujarat or Maharashtra. Much of that is now going to happen as syllabi converges to the CBSE model across the country. So, there is going to be earnings growth and that will perhaps drive P/E rerating. So, with the kind of return ratios and 10 times valuations right now, I would say an Rs 80-90 kind of price target in a year’s time cannot be ruled out. Q: The other stock that you like is Birla Corporation, take us through its performance.
A: Birla Corporation is an interesting stock because here is a binary case for making money. Its headline valuations are very cheap compared to the rest of the cement sector. We are looking at anywhere between USD 30-35 EV per tonne valuation for FY14 or FY15 capacities. This is not a small company. The problem with this company is two-fold. They are caught for the last seven-eight years in a legal dispute on who owns the company.
Secondly, there has been a ban on limestone mining at their mother plant which is at Chanderia because of environmental damage or damage to the historic Chittorgarh Fort nearby. The second problem is gradually moving towards some kind of solution. Two days ago, they said they are going to get a four-week trial period in which they can do mechanical mining of limestone. If that problem is solved, then there could be a substantial rerating from here. At USD 32 per tonne, there is no money to be lost. Q: Oriental Bank of Commerce (OBC) has been through a difficult patch with regards to its asset quality but do you think it is turning the corner?
A: The thing is public sector undertaking (PSU) banks go through love-hate phases with the public, with the investing fraternity. If you look at the Bank Nifty for the last three months, it has lost about 3 percent and OBC is down some 18-19 percent.
The valuations favour believers when the stock was much higher than where it is today. The stock is available for 0.72 times or on FY14 adjusted book value.
Secondly, there is a very high level of credibility that the management brings to the table here. Around the beginning of the year, the new management said that slippages would continue to be high and would be in a certain range. I think they are going to close the year at Rs 3,000 crore or less and I think that is very credible versus a whole lot of their peer set. So, they are saying, it is a tough time that they are having but they are able to stir within and I think that adds to the credibility. That is what makes the 0.7 times or 0.72 times price by adjusted book very credible today for me.