Positive on Pantaloon: Tulsian

SP Tulsian of sptulsian.com, says that in the organized retail space, Pantaloon is the best company available in terms of network and infrastructure. The desperation or the compulsion on part of the promoters to induct a strategic foreign partner quickly can also see the deal getting concluded at a reasonable valuation. Considering these factors, I maintain my target of Rs 240 over the next couple of months in this stock.

Below is the edited transcript of his interview to CNBC-TV18. Q: There is profit taing in PFC and REC. After today’s 1-2 percent correction what is your call?
A: Overall, I have a positive view on the sector. The stocks of both these companies are at a level where profit booking is obvious. The stock can move upward once it corrects by additional 2-3 percent, but this view can only be taken for a limited one-week period because I don't think that the theme or the flavour of discom restructuring can really last for a longer time because market is very dynamic. Q: Where do you see expiry this time around? You think it could get to those levels of 5700-5750 or so?
A: The resilience is largely because of the expiry and I expect the expiry to likely happen at 5700. We may see a dull and boring session on Wednesday and Thursday revolving around those levels. With the kind of strong bull hands or the bull grip which we have been seeing in the market indicates that it cannot really fall below 5600 or may be 5650. Since, I take a call at a multiple of every 100, so, I think that looking at the trend the closing or the expiry is likely to happen at about 5700. Q: Many brokerages have said that JSW Energy and Lanco Infratech will benefit on the back of the power move. Do you see a further upside in these names and does it makes sense to enter after the run up it has already seen?
A: By and large this move is good for all the power generating companies. Lanco has an operational capacity of close to about 4300-4400 megawatts and JSW Energy has close to about 3,000 megawatts generation capacity and both these companies have entered into PPA. By and large that will be seen as quite positive in terms of amount blockage, which they have been seeing with the state electricity board are not going to happen from hereon. So, that will ease their working capital position.
Overall, companies who have the operational capacity of close to 3000-4000 megawatts, the move of SEB restructuring is definitely positive for them. One can expect a further gain of 6-8 percent. Q: What about Pantaloon? Ever since that news about FDI in retail has come through the stock is just shooting away. Do you think it is a good time to take profits or do you see more on the anvil?
A: I will advice investors to remain invested in the stock. Now, the next move of the promoters will be to hunt for buyers and these negotiations do take some time. We may see name of some serious buyer by next month who will be interested in acquiring the stake. In the organized retail space, Pantaloon is the best company available in terms of network and infrastructure.
The desperation or the compulsion on part of the promoters to induct a strategic foreign partner quickly can also see the deal getting concluded at a reasonable valuation. Considering these factors, I maintain my target of Rs 240 over the next couple of months for this stock. Q: If USL, Diageo deal goes through is there any trading opportunity in any of the related group stocks because once the deal goes through it also removes the overhang from other companies in the same group?
A: If the deals happens then there will be opportunity in all the stocks. In the case of United Spirits, if Vijay Mallya is able to sell at Rs 1500-1600 per share which is the most reasonable price, then also he will not be able to mobilise more than Rs 6,000-6500 crore from this sale.
If Mallya wants to induct any foreign partner in Kingfisher Airlines then he first needs to make KFA a debt free company. In that case he is required to pay around Rs 5,500-6,000 crore to pay off their debts to the banks even if he makes one-time settlement with them. If that happens, then a positive view can be taken on Kingfisher Airlines and the share can move to Rs 18-19 in next one month or so after the deal for United Spirits happens.
Similar will be the case with Mangalore Chemical. I don't think that Vijay Mallya will be too keen to dilute his stake or divert his attention even in the smaller companies like Mangalore Chemicals by which he can realise around Rs 600-800 crore by selling his 30-35% stake.
Though United Breweries is a joint venture between foreign partner and the UB Group – 37.5% each, but I think the valuations or the re-rating of the stocks will all happen. So, we can see good improvement. UB Holdings and McDowell Holdings hold shares of United Breweries, United Spirits, and Kingfisher Airlines. Obviously, they all will get rerated because there will be no fears of any corporate guarantee having given by UB Holding of Rs 8000-8500 crore to banks. I am not too keen or sure whether that sale of United Breweries Engineering will happen or what will be the impact on the share price. However, I have a bullish view on all UB Group companies. Q: How you would approach RCF?
A: RCF is meeting the guideline of reducing the government stake also below 90 or close to about 90 percent. But since the government is holding 92.5 percent they don’t want to just dilute 2.5 percent.
So this is just a process of more to comply with the public shareholding norm also. Similarly, we can see other company National Fertilizers also coming in the same category because there also government is holding 97.5 percent stake. Both the companies RCF and National Fertilizers are similar in terms of the equity base, in terms of the financial performance etc. I won't take it as too exciting move having initiated by the government. Q: If someone was sitting on United Spirits then of course it makes sense to wait. But what if as the values that have been talked about of about Rs 1600-1700 etc. Do you think a fresh entry at this point would make sense or is that too much of a gamble now?
A: The valuation is likely to happen at Rs 1600 level. In the Q1, the company had posted an EPS of Rs 11. The financial performance of the company has been to its least.
Once Diageo comes in, which is neck-to-neck with United Spirits – both are selling about 120 million annually, then definitely the financial performance will improve from hereon. Even the interest burden in the United Spirits will be reduced as they are eyeing 51 percent stake, even if they acquire 25 percent from Vijay Mallya and 26 percent from open offer. So that can easily take the EPS of the company to 50 plus. On practical basis if we can give a price-to-earning multiple of 40-45 to a company like Jubilant FoodWorks where I have seen all the analysts are so gung-ho and taking a positive call. I don't understand why the PE multiple of 60 cannot be given.
United Breweries is now ruling at a PE multiple of 75. It is a Re 1 stock while United Spirits is a Rs 10 stock. Once Diageo comes in the stock will get vastly rerated, there will be improvement in the profitability and I won't be surprised to see the share ruling to the offer price at which it will be made.
If the deal happens at Rs 1600 and the open offer comes through the shareholder it will not be – maybe for a short-term, from a arbitrage point of view it maybe fine to tender your shares, but ultimately if that happens with 51 percent stake of Diageo, I hold really very positive and that was a reason I recommended the stock in the first week of January when it was ruling at Rs 450 expecting this development to happen on which I have been taking this stake sale call for the last 3-4 months. Q: What is your view on sugar now?
A: As the government is not increasing or scarping the levy quota of 10% the stocks are weak or liquidation of the trading positions. But I am keeping my positive stance. The move to dismantle will come in the next couple of months because the effective burden will not be more than Rs 2000-2500 crore to the exchequer, to the central government, but this will give a big boost to the sugar sector. Near-term weakness is seen. I have a positive view on sugar sector for long term or six months horizon.