Muthoot, Mannapuram may not post positive Q3 nos: Tulsian

Shares of gold loan companies saw a surge today after Rao panel recommended that gold loan firms be allowed to lend 75 percent against the value of gold pledged, against 60 percent as is the norm now. Manappuram Finance and Muthoot Finance showed strong performance on the back of the news.

Also read: Rao report to remove negative perception of sector: Muthoot
However, SP Tulsian of sptulsian.com in an interview to CNBC-TV18 says he is not too optimistic on the companies' performance. He says, " I would give it another 10 percent upside from here, because if you really take the valuation call, I don’t think that Q3 numbers will really be very exciting for Manappuram General Finance or Muthoot Finance." Tulsian has given a target of Rs 44 on Manappuram Finance and Rs 250-255 Muthoot Finance in the short-term.
On the news of the Etihad - Jet Airways deal, Tulsian opines the deal is expensive. "The urgency or desperation on part of Etihad is making them to open dialogues with Jet Airways. Inspite of a deal that is likely to happen at about USD 330 million, it is now being discussed. It seems to be quite expensive with the enterprise value of close to Rs 24-25000 crore for Jet whereas, this could have happened with Kingfisher Airlines at an enterprise value of about Rs 14-15000 crore," he says. Below is the edited transcript of Tulsian's interview to CNBC-TV18. Q: Give us your perspective with regards to Jet possibly closing in on a deal with Etihad? How do you expect the stock to react? It is already above Rs 600?
A: Etihad seems to be a serious buyer. Infact, they have been deliberating with all three airlines. In the past, we heard they were having plans with Spicejet as well, but their interests were seen more with respect to Kingfisher Airlines.
However, the promoters have not been able to make any headway. There is no headway either in terms of settlement with the banks, their debt, settlement with their payment of liabilities. Apart from that, the licence renewal has also been pending with the director general of civil aviation (DGCA). Things were not moving on all these pending issues.
The urgency or desperation on part of Etihad is making them to open dialogues with Jet Airways. Inspite of a deal that is likely to happen at about USD 330 million, it is now being discussed. It seems to be quite expensive with the enterprise value of close to Rs 24-25000 crore for Jet whereas, this could have happened with Kingfisher Airlines at an enterprise value of about Rs 14-15000 crore. Q: A couple of analysts indicated that although the deal on paper may look quite expensive, if Etihad comes in for a long haul and gets a player that has about 26-28 percent market share, then is not a bad idea. We have seen Jet Airways at much higher values as well in the past. For the longer term, do you think this strategic stake that Etihad might buy, might yield in big long-term returns for Jet Airways shareholder?
A: If you want to take a call, you need to take everything in the present circumstances. Lets assume the extreme reaction. SpiceJet is having an enterprise value of close to about Rs 5000 crore. Theoretically, even if Etihad joins SpiceJet because Etihad has its own strength, they have their own financial power, they have their own infrastructure and networks, so things will get ramped up.
Now, it all depends on the competition and the quality of services which will ultimately decide which airlines will grab the market share. So, one may argue that things are not looking quite expensive for Jet Airways, but on a relative basis if they would have got a deal with Kingfisher Airlines or SpiceJet, even they would have been quite happier. However, the first mover advantage will always be there and Etihad is trying to catch by consummating a deal with Jet Airways at the earliest because in today’s time, in the private airlines Jet Airways is the only reliable airline that has a widespread network in the country as well as outside the country.
That is the preferred choice, but ultimately, it is the cost benefit or the total valuation which needs to be kept in mind. However, since they have been taking a call on Jet, they must have taken everything into consideration as to that what extra or to what extent they are paying premium over the other airlines. Q: How much more of an upside would you give some of these gold loan companies like Manappuram General Finance and Muthoot Finance?
A: I would give it another 10 percent upside from here, because if you really take the valuation call, I don’t think that Q3 numbers will really be very exciting for Manappuram General Finance or Muthoot Finance. So, maybe, things will move from here on. Infact, today Manappuram is frozen upward at 20 percent circuit and even Muthoot has been ruling quite strong. However, a level of about Rs 44 on Manappuram or Rs 250-255 on Muthoot should be the targets in the near term. Q: Any view with regards to state electricity boards (SEBs) possibly hiking tariffs. And hence any sort of impact we could see on Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) from current levels?
A: The government is very determined to improve the health of the distribution company (discoms) and that is infact a right move. We have seen an increase of about 20 percent in power tariffs in the calendar year 2012. A same kind of increase of about 20 percent is expected in 2013, because the economy cannot revive unless and until you make electricity available to the industry and even to the consumers. If you do not have the capacity addition, infact we all missed on the 11th five year plan of our 76000 megawatt target. Now, for the 12th five year plan, we have 80000 megawatt target.
So, the discoms health needs to be improved. At the moment, you see that the SEBs are improving their health. There will be no default to the financiers. Since PFC and REC are both dedicated power generation financiers, obviously they will stand to gain. Infact, I am seeing positive effect of this happening with the banks also, largely with the public sector banks like Punjab National Bank (PNB), Bank of Baroda (BoB), Canara Bank, State Bank. These have huge exposure to power generation companies. So, overall it is very positive, but yes because both are dedicated agencies and infact if their financials, both PFC and REC’s financials have been ruling at a PE multiple of 7-8. They have a very strong book with only Rs 100 thousand crore advances by both the companies. So, I think this move is justified in share price of both these companies because of this increase in the power tariff by SEBs.
_PAGEBREAK_ Q: What are your views on Geometric software deal? What's the deal with the stock because it’s doubled since the start of the year. How much more growth do you see there?
A: The stock is seen to be in strong hands and Rakesh Jhunjhunwala has increased his stake also in the company. If you see the present acquisition, though it may look to be small, may be at about 7 million euros or something like that, but if you see, that has been made from the cash accrual. Infact, the idle cash lying in the company will get used. Whenever we see upmove coming in the stock, it comes very swiftly. So, maybe a price target of Rs 110-112 can be seen in the stock price in next couple of days or so. Q: Any view with regards to Kingfisher? If in case Jet Airways actually goes ahead with Etihad or rather the other way round, then what do you think would happen to Kingfisher in terms of a stock performance from the current levels of around Rs 14?
A: I am keeping a positive view on both the airlines. Suppose for any reason if Jet deal happens with Etihad, that will be seen as the most expensive deal with enterprise value of about Rs 23000-24000 crore. So, if that forms as a basis, if UB Group can come out with a concrete formula by paying the substantial amount to the banks and if they can bring their debt down, maybe to level of about Rs 4000-4500 crore and pay off the suppliers liability, then they can get very good valuations. I am not too concerned that the airline is not operational and same thing will happen with SpiceJet also. So, if for some reason, the deal happens even at USD 300-310 million for 24 percent stake, then that will be forming as a benchmark and that will be seen quite positive for both.
Once there is any progress initiated by Kingfisher Airlines promoter, by the UB Group to the banks, then at we can see a good upmove in the share price. However, there are all kinds of certainties. Infact, inspite of having stake sale made by them to Diageo in United Spirits, we are not seeing any headway happening in that direction in terms of submitting the revival plan, discharging the liabilities of the employees income tax dues and even the concrete plan with the bankers. So, I am not worried. The downside on both the airlines, Kingfisher and SpiceJet is very limited. A level of Rs 14 and maybe a level of Rs 45 seems to be a strong support for both the stocks.

Q: What’s your view with regards to Dr Reddy’s Laboratories?
A: We need to take a positive view. That is what I have been holding on all the pharma companies, largely the larger ones like Dr Reddys Laboratories. I am quite positive on Wockhardt and Ranbaxy also including Strides Arcolabs. So, the kind of improvement that we have been seeing in the company for the last four-five quarters is keeping the momentum on the stock. One should keep a positive view with a time horizon of six months or so. Q: How do you approach some of these beaten down names like Hindustan Construction (HCC), Punj Lloyd etc? Do you still remain cautious because there is no improvement in fundamentals at all? Or do you think this wave of a risk-on-rally will sort of take many of these stocks with it?
A: You need to be very careful in the infra space. I don’t see any move on the part of HCC either to pair the debts or monetising any of their assets or maybe in terms of improving their profitability or margins of their core business. Infact, sometimes I feel that they have gone all out of focus. Maybe there is some buying coming in at the lower level, but I don’t see any kind of improvement happening. I will put the same status to a company like Gammon or Punj Lloyd.
Again these stocks have been participating in that, but one needs to be very careful in selecting the infra stocks. I am keeping my positive stance on stocks like IVRCL, Nagarjuna Construction (NCC), Ramky Infra, Gayatri Projects, Adani Port where things are on part of the management to monetise their assets to reduce the debt. Infact, the core business seems to be intact. It’s just a matter of what reducing debts that will curtail your interest liability. So, one needs to breakup the infra parcel into two parts and wherever there aren’t any kind of steps being initiated by the promoters we should be taking the positive view on them. Q: Any view on why exactly the Indiabulls stock possibly saw a rally as a group in late trade?
A: I can’t give you any specific reason for the upmove in all the group stocks, but I find only two stocks worthy of looking for investment. One is Indiabulls Finance and second is Indiabulls Real. If you see their business model or the valuations, Indiabulls Finance is ruling at a price-to-earnings (PE) multiple of close to about 8 times on the FY14 earnings. It is the same thing for Indiabulls Real. If you see the real estate portfolio, Housing Development & Infrastructure Limited (HDIL) and Indiabulls Real Estate have been witnessing very good trading interest for the last month or so. However, all other stocks are penny stocks. You see this kind of trading interest coming in, which is  generally found not sustainable in other than these two stocks. Q: What are your views on Anant Raj Industries? The management was quite optimistic about their golf course project generating further revenues, maintaining their bottom line growth at 30 percent. Do you like the stock?
A: Yes. Infact if you see the past calls, the company has given the target that by FY14, they will make the company debt free. Infact, if you see the status of this company, upto 2009 or 2010, it was a debt free company but since they raised a debt of close to about Rs 1200-1500 crore, they ran in little trouble and the profitability dipped. However, they have a very good portfolio of the projects. Infact, they have a mix of all. What I like about the company is that many of their completed premises are on lease and they fetch a very good rental income or the annuity income from that. Since their development projects or the completion of the projects are very much on schedule, the only problem which used to exist with the company, is the portion of the debt which they seem to be determined in reducing. They are determined in making it debt free in the next one year or so. So, I am keeping a positive view on the stock from that angle with a time horizon of six to eight months.