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Last Updated : Jan 07, 2013 06:43 PM IST | Source: CNBC-TV18

Cautious on REC, PFC and NTPC: Tulsian

SP Tulsian of sptulsian, says that both REC and PFC had a good run up and investors should book profits in these stocks. These stocks can see correction of arounf 10-12 percent. He is also not optimistic on NTPC, as the company does not have the authority to increase the power tariffs and the capacity addition has not been good.

SP Tulsian of sptulsian, says that both REC and PFC had a good run up and investors should book profits in these stocks. These stocks can see correction of arounf 10-12 percent. He is also not optimistic on NTPC, as the company does not have the authority to increase the power tariffs and the capacity addition has not been good.

Also read: Mkt to post 15-18% returns in 2013: Prabhudas Lilladher

Below is the edited transcript of his interview to CNBC-TV18.

Q: What is your view with regards to 20 percent import duty which will be imposed on hot-rolled (HR) flat steel products from China?

A: The makers of HR coils have mentioned that the off take of the products has been poor. China is the largest producer of flat steel products and they control capacity of above 500 million tonne, around 40 percent of the total world capacity.

China is passing through a very bad phase with lower capacity utilization for their product. When they are operating on the marginal cost, then in principle it is very easy for them to dump the goods in the neighbouring countries including India. To protect the domestic players like JSW Steel, Tata Steel and Steel Authority of India (SAIL) the government has hiked cost of import duty. I am not taking a call on JSW ISPAT, because since that company is getting merged with JSW Steel the impact of that will not be shown or it will move in line with JSW Steel.        

Q: Hindustan Motors has managed to notch up gains of around 20 percent. It is a penny stock, a little above Rs 12. What would you assume with regards to restructuring and what we could expect?

A: Whenever there is any news of board meet for restructuring of the company. We see frenzy buying or the re-rating of the stock happening. They have already hived off 49 percent stake in Evitech - the transmission company, which was the prime asset about couple of years back. Nobody is aware how the money was utilized.

Around four year back, they sold 300 acres of property at their factory in the suburbs of Kolkata. The company received Rs 50 crore after every six months, totalling to Rs 300 crore and the money was used to repay losses.  

The company has two operations, first they are making castings and forgings and supplying to other auto makers from the place where they used to make Ambassador. Second, they have the car-making plant near Chennai where they are making cars for the other Special Utility Vehicles (SUVs).

There is no clarity on their restructuring plan. Considering their track record, the value destruction has happened on sale of 300 acres and transfer of 49 percent stake in Evitech Ltd. I don't rely on the management that even after restructuring the proceeds will  ultimately go in bits and pieces in financing the losses, which the company is incurring every year of around Rs 100 crore.

The market has received this move well but in the long term there will not be much cheer for the shareholders.

Q: In last two trading sessions IFCI saw an up move of 15 percent. What is the specific reason for the up move and how much more do you think?

A: Combination of reasons is heard in the market. There are three factors, the prospects of a banking license, induction of a strategic investor and maybe merger with IDBI.

I don’t expect IFCI will get the banking license because if one see the business model of IFCI, the condition and the performance of the company has deteriorated in last couple of years with more centric stock financing or financing to the promoters against pledge of shares definitely will not make this company eligible for the banking license.   

I don’t see any strategic sale happening, because if you recall the government has taken a decision which has been affirmed by the President of India also that all the government companies having 51 percent stake will not see stake dilution or none of the government companies will see this stake falling below 51 percent.

So once this company has become a government company because of conversion of Rs 923 crore convertible and optionally convertible debentures even that possibility is ruled out and if you come last on merger with IDBI bank that can happen. Now the book value of IFCI stands at Rs 32 ruling at Rs 40 that means price to book of 1.2. 

If I take an estimated EPS of close to Rs 3.5-4 for FY13 it is ruling at a PE multiple of maybe close to about 11-12 times which is seen quite expensive. So even if the merger happens with IDBI the ratio will be unfavourable to the shareholders of IFCI. I just see this trading exuberance. I do not see any reason. In the past also whenever we have seen this kind of upmove happening in IFCI people got trapped at the higher level. So, I am quite negative on the stock. I am not keeping any positive stance on all these three counts. I remain cautious on all three counts whatever we have been hearing in the market.

Q: What is your view with regards to HDFC Bank and Housing Development Finance Corporation (HDFC)? Both have actually been down and out for two trading sessions now?

A: I do not see any specific reason. Neither there is any fear on the Q3 numbers, nor there is any fear on the asset quality. Mistry has already given a roadmap of 20 percent growth for next three years. I do not think that any of the promoter is seen to be so confident and having given their growth projects for next three years and 20 percent Compounded Annual Growth rate (CAGR) really matters a lot. There is a consensus that HDFC Bank is the most expensive private sector bank, but the trend shows that this stock commands a premium. So maybe some profit booking is coming in, nothing else. I do not think that there is any kind of fear on this correction on the twins.

Q: How would you approach the United Spirits' now? There is a talk that the open offer has gotten delayed because of regulatory issues. What do you think the next step of Diageo will be?

A: Delay is obvious whenever we see any stake buying by the MNCs in any company. If we go by the contours of the open offer – the open offer is to be made at Rs 1,440 per share by the Diageo. In the current circumstances whether the open offer comes today or after couple of months the share will not any kind of response. According to the informal statements or market feeling, Diageo have very clearly stated that they will not revise the open offer upwards.

And rather they will be for the time being remain contended with a stake of 26 percent and will gradually see it increasing from the 'creeping acquisition' route.

That means 5 percent acquisition every year from the market. But I don't think this happening, probably they will test the bottom and which we have seen the range of maybe Rs 1,900-Rs 2,050 - for the last couple of months the stock has been moving in that range.

So, once the permissions come then probably Diageo will be keen to raise their open offer price to close to about Rs 1,900. They will try to mobilise as many shares as they can because they will at least convince the institutional investors. Those who have been holding close to about 45-50 percent stake in the company.

And definitely they will try to garner some of the stock at about Rs 1,900 because eventually in the next couple of months even market and large investors will realise that the near-term valuation of the company or the stock stands at Rs 1,900-Rs 1,950. This seems to be the picture going ahead for the next couple of months.

Q: What is your expectation from Petronet LNG this time around and how are you positioned on the stock?

A: The expectations are that the things will be better, because if you really see the sequential performance, they have all been continuously improving that and the demand of the LNG has been quite strong and they should be able to maintain their margin because the spot realizations have been quite high. So I am expecting better numbers from the company.

Q: Would you buy any of these power finance companies on a dip - REC and PFC?

A: All the stocks have seen a good run up and this is a time to book the profits. Maybe a correction of 10-12 percent is warranted in both these stocks, because we always see this kind of trading pattern happening that whenever the profit booking comes in, it comes in swiftly and it gets corrected by about double digit. So maybe I will wait for a correction of at least 10 percent in both the stocks.

Q: Any view with regards to NTPC which hits the market first week of February?

A: I am not very optimistic on the stock, because if you see the tariff behaviour, the company does not have the authority to increase the power tariffs and the capacity addition has not been very great. They have all stuck in the power generation capacity of 37,000-38,000 megawatt in spite of having very ambitious plans. Government will have to really attract the overseas investors by offering them discount of 3-4 percent from the current price. There will be appetite for the stock, but I don’t think valuation beyond this. The government could fix a floor price of Rs 145-150 for divestment.


First Published on Jan 7, 2013 04:52 pm