18 for 18: Praksah Diwan's top stock ideas for 2018

A: Just before I start explaining EIL and the other picks. I just wanted to caution people that this is the first time that instead of focusing on target price, we are also talking about a decent level or zone to get into. And for this stock, you very rightly said, ever since the earnings came through, it has actually moved up significantly. But I believe you will get, the market will offer us a decent opportunity to enter some time in the first half. Maybe the first quarter itself of 2018. So, hold your horses, do not go and buy on Friday morning or Monday morning. Give time for these stocks to come into the right zone for your buy to make meaningful sense.

And EIL, at current levels is also discounted fairly well. The reason being the earnings in the hydrocarbon business is a lot dependent on execution and there is a long way, the projects are with a very long cycle in mind. It is not like consumer goods or autos where everything is very visible. But my sense is EIL is in a very great sweet spot. You have seen crude go up suddenly. When oil marketing companies (OMC) are sitting with the kind of money that they had, they are no more going to enjoy themselves the way they have done for the last two years. They will have to invest into backward integration and put a lot of money into the refining side.

And what is going to happen is scale is going to become critical in this business. So the smaller refineries will have to scale up or die. When that happens, companies like EIL starts getting a lot of businesses, a lot of order booking. I will not be surprised if they cross Rs 21,000 crore by 2020 also which is the next 15 months. And that translates into some very decent operating leverage coming in because you really do not have to deploy too much of assets to be able to execute that.

And the marching trajectory will also improve because they have started focusing a lot on project management consultancy (PMC) which is very similar to what NBCC does on the construction and infra side, EIL does on the hydrocarbon side. So it is just project management consultancy which pays them much more, the return on equites (ROE) are better. So all said and done, it is a great stock to have in your portfolio but buy it on lower levels.

Surabhi: How much lower would you say?

A: I would give it a range of Rs 165 to Rs 170-175. Also, potentially if something goes wrong with the market, there is a correction which is significant enough. And this time around, out of the picks that we have, quite a few are futures and options (F&O) items. So you also have the potential to hedge your buying on the cash side. So EIL, at that level would make sense. You could keep on accumulating. The target is about Rs 220-225 which is not much from current levels, but it will be about 25 percent from the level that I am talking about.

Nigel: Your second pick for today Kirloskar Ferrous Indus, capacity utilisation levels lower, so it is given that headroom and I think balance sheet not to bad?

Diwan: I think the rally on metals will possibly continue and percolate now from the largecaps to some of the select midcaps smallcaps also. In fact this is one of the very few small caps that I felt still hasn’t got re-rated crazily upwards and lost out on the potential to buy in. What is good about this company is one is of course the pedigree is very strong and as you said financials are in place. They have descent cash on the books, debt-equity ratio of just about 0.3, they would move into return ratios of 20 percent plus, 21 percent plus in the next year- year and a half. They are into castings and pig iron, their two primary business. Now the pig iron business is very simple to kind of understand, but the moment application of steel goes up the conversion from iron ore to other forms of steel needs pig iron. That is an intermediate stage that you have to go through.

Now what was happening is Karnataka unit which was there since a long time never had order books which are very decent, but lot of these mines that have re-opened around Bellary and all that and that is giving them a huge advantage. So, they will get operating leverage and as you said castings are using 50 percent capacity they have already done enough Capex they don’t need to put in more money. Castings what do they make? They supply a lot of equipment’s to agri equipment manufacturers. So, it is tractors, tillers and that is an area which all of us love, so there is so much of an upside there. So, this is in a sweet spot, has a very good relationship with clients for long years, Kirloskar pedigree to back it and interestingly last quarter some of the domestic institutional investors (DIIs) increased their stake in this business also.

So, I think it is probably that stage where it is getting kind of ready to take off. I would give it a target of about Rs 145-150 whereabouts but you could buy this at current levels or at dips and definitely it will be seeing some major moves for the 2018 kind of period.

Surabhi: Finally time to pin you down because incidentally, we were just having a discussion on the show. You like aviation, but you would not give us a stock name till now. So let us hear it.

A: That was still market hours. I am very positive on the fact that this is an extremely difficult and risky business and we still have the listed players doing very well. And the reason is because we are probably at the take-off stage for the entire sector as a theme within the country. And I was surprised pleasantly to hear that IndiGo has been the first company to have taken off 1,000 flights in a day. Now 1,000 flights in a day is really big and very few companies have been able to do this in such a short span of time. But here we are not talking about IndiGo. The pick that I have is Jet Airways.

Surabhi: Despite the run up. That is what I think. Despite this massive run on the stock already.

A: On crude, yes.

Surabhi: On Jet Airways itself.

A: But it is like this. Everybody is expecting IndiGo to be so well performing that if there is any slippage in their performance metrics, people will punish it. But if Jet does even half as good, they want to reward it amply. So that is the whole expectation from Jet because it has been a down and out.

People who have flown Jet Airways know that it is primarily because of the connections that they have in certain sectors and the JPMiles that you get, that boasts business class travellers also on the corporate side. But, my sense is Jet has started doing a lot of things in terms of cutting down costs. Their efficiencies would change dramatically and if you have a KLM or an Air France or somebody bailing them out on the balance sheet, apart from profit and loss (P&L) the balance sheet will also start getting repaired quite well. And if you notice, quietly, there has been a reconstitution of the board itself.

So, from a lot of people who are just iconic names and generalists, sitting on the board, they have actually got people with experience from aviation and similar sectors and that is driving things very rapidly. So if Jet transforms itself, it will get rewarded very easily. So I am expecting that to be a turnaround story of sorts.

Surabhi: So how much more in 2018?

A: I would not be surprised if it goes to that Rs 1,100 kind of a mark as well. So I know it has already moved quite well, but it will be volatile, it is not going to be a smooth ride. But it will reward people. Patiently hold on to it, especially this year.

Nigel: You are picking up Camlin Fine Sciences. The stock has flattered in the past to only deceive but this time you believe it is good for more?

Diwan: Yes, because it has been a laggard of sorts. Let me run you quickly through what it does and that is what makes it so compellingly attractive. This company is the third largest player in antioxidants and food flavours which is something that is very unique in terms of chemistry and is not easy to replicate. The problem with them was that they have not been able to scale up, but what has now happened is that their Dahej unit in Gujarat, there is a financial closure they have been able to manage. They raised some money through promoter preferential allotment and some QIP which was very small though.

Now once it gets into this whole value chain from raw material to final food blending and especially in the export markets in the US and all, and you all know that US is picking up dramatically and is expected to do so in 2018, I was looking at a theme which is linked to the US growth story and was into chemicals and had no competition and this qualified. My sense is it could see a growth of about 30 percent on revenues and EBITDA could probably double in these next 18 months. So that is where the story lies. Even if you discount FY20 earnings which is 15 months away, probably with even 21-22 you get a target price of Rs 199-200 which is a decent upside from where it is. So hopefully, it will make the right noises and not disappoint this time.

Nigel: Finally the 18 stock is a Nifty stock it did well it was welcomed into the Nifty after that it has not done much?

Diwan: This is UPL, as you said it did well, but it has just come into the Nifty so there is still long way to go. What actually worked against them and which brought the stock down was they had a lot of one of expenditure which came on account of some legal issues battles that they were fighting in Europe on patents and all. But their new product development has been so robust that once the Latin American, North American market takes off for them which they are initial signs of that moving very soon you will see this company getting re-rated very whole heartedly. Whatever has been taken away from it will probably come back to it in a significant way.

It is a Nifty stock risk reward is favourable, discount at 16-17 times on FY20 you will still get probably Rs 1,000 as a target which is 50 percent from where it is now. So, I loved the set up. It is a Biocon of 2018. It kind of surprised people because it has not done anything, nobody has bought into it, but great pedigree and great product line as well.