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18 for 18: SP Tulsian's top stock ideas for 2018

What a dream run it has been for the Indian equity market in 2017 - and who would have thought. If we rewind back and talk about all the gloom and doom that were surrounding us back in December of 2016; demonetisation and impending huge indirect tax reform. Well, the Indian market has come a long way and come on top. In this CNBC-TV18 special show '18 for 18', SP Tulsian of sptulsian.com gave top stock ideas for 2018.

December 28, 2017 / 03:05 PM IST

What a dream run it has been for the Indian equity market in 2017 - and who would have thought. If we rewind back and talk about all the gloom and doom that were surrounding us back in December of 2016; demonetisation and impending huge indirect tax reform. Well, the Indian market has come a long way and come on top.

In this CNBC-TV18 special show '18 for 18',  SP Tulsian of sptulsian.com gave top stock ideas for 2018.

Below is the verbatim transcript of the interview.

Surabhi: CG Power, a company that has gone through the motions splits its business into different verticals, is there a big turnaround in the works? What are you expecting from the performance going forward?

A: Actually, CG Power did a mistake of foraying into the overseas business and that was the biggest mistake they did in 2007. In fact their domestic business has been doing quite well and having realised that mistake the company has started in fact monetising all the overseas assets maybe for the last three years and now that seems to be coming to an end. They have sold their Ireland unit, Germany unit, Brazil, US everywhere except for Thailand, the transformer making unit which has turnaround and now contributing n a big way so practically if you see pending amount to be received because many of the deals having concluded in the last six months or so, still they have to receive the money from the buyers of those units.

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And if one sees the financials of the company of September, 30, you will find that on a net of basis, it is a debt free company, maybe with some cash in their hand. And now, company is totally focusing on the Indian business. And as I said, the Thailand business also, which is profit making. If I just quickly go through, they have a very strong presence in power system and industrial system and now, the two areas, one is transmission and distribution and second is railways. We all know that railways are now migrating from the diesel to electric locomotives. There the company is enjoying a very good competence and that is going to give them a very good leeway going forward. In fact, an order of about Rs 111 crore has already been received from the railway recently in the last one month by the company.

If I quickly go through the financials of the company, it has already posted a standalone income of about closer to Rs 600 crore with earnings before interest, taxes, depreciation and amortisation (EBITDA) of about Rs 250 crore. And interest, as I said, major amount has been received in the second half or maybe is going to get received now. The interest liability was Rs 106 crore and in spite of that, company had a profit before tax (PBT) of Rs 85 crore and profit after tax (PAT) of Rs 70 crore. So going forward, maybe for FY19, I am not banking too much on FY18 because that is more for the balance sheet cleaning, this can, stock is seen to be an inflection point because of their core competence and focus on the domestic market.

So taking all this into consideration, equity is also seen to be quite low at Rs 125 crore. And if I take the market cap and enterprise value (EV) because as I said, it is a debt free, it is about sub-Rs 6,000 crore and generally, if you take a comparable peers, maybe like ABB, Siemens and all that, they always rule at an EV to sales of about six times, maybe five to six times, while this company is ruling at an EV to sales of 1x. So tremendous potential going forward from FY19 onwards. Promoter stake is 35 percent, but the institutional holding is at 52 percent. So taking all this into consideration, one can keep a target of about Rs 115 in the year 2018 on the stock.

Surabhi: Next stock on your list is AksharChem India, interesting place Speciality Chemicals, I was trying to do whatever little reading I could after the market, so vinyl sulphone I believe is a big product for them what could be the triggers here for this company?

A: In fact I would say that the company has two product profile one is dyes and pigment and second is dye intermediates. Take the dyes and pigments - CPC Green, CPC Blue are the main products and if you take dye intermediates then vinyl sulphone forms the big this one, they are foraying into the H-acid also which is again a dye intermediate plus they are foraying into precipitated silica also.

Under the expansion, company is carrying out an expansion of about Rs 175 crore which should get completed may be in six months’ time and in fact in spite of such a big Capex company will remain a debt free because for the simple reason that they raised about Rs 69 crore with the qualified institutional placement (QIP) having made in the month of July at Rs 776 and now the share is ruling closer to about Rs 700. If you see last year that is FY17 had fabulous year for the dye intermediate largely because of the increase in the prices of vinyl sulphone, H-acid, J-acid, gamma acid and in fact many of the players pure the dye intermediates have really shown excellent numbers. So, while comparing year-on-year in spite of company having posted an earnings per share (EPS) of Rs 21 for H1 share price has corrected because obviously market had disappointment because there was a drop of about maybe 50 percent in the profits after tax (PAT) and the share corrected from a top of Rs 990 to the present levels of Rs 700.

If you see the theme going for the dye intermediates and dyes and pigments both are doing very well. They are the largest exporter of vinyl sulphone from India having 45 percent market share plus they are having one amongst the largest producer of CPC Green amongst the world having the 10 percent market share. So, once they will be having this expansion completed in next six to eight months their topline will increase by about 80 percent giving excellent operating leverage.

As I said company will continue to remain debt free. So, if I have a H1 EPS of Rs 21, H2 is definitely better because of the increase seen in the realisation in margin of dyes and pigments and dye intermediates. So, take Rs 45 as EPS for FY18; for FY19 I think that will be a real big explosion in earnings. I won’t be surprised to see an EPS of about Rs 75-80 also for FY19 and that will really be a big kicker for the company to post growth in its topline as well as in bottom-line. Maybe topline will show a growth of about 60-65 percent bottomline will show a growth of about 80-85 percent. So, taking that into consideration share can give you a level of about Rs 880 in a six months or so which is now ruling closer to about Rs 700.

Nigel: You are looking at a cement company? Give us details there. What is the target price?

A: In fact, we have been keeping extremely bullish view on cement and in fact, I will not be surprised to see the average capacity uitilisation which is now seen at around 70 percent across India will get increased to about 85 percent. And in that theme, JK Cement, in fact, what is happening, market is giving good valuation to the companies having capacity of 10 million tonnes. In fact there are three layers, 10 million, 25 million and 50 million.

And 50 million and above only falls one company that is UltraTech and there are many companies in the 25 million space and 10 million also. So if you take a call on this company, they have a 10.5 million grey cement capacity. Apart from that, they are into white cement also with a capacity of six lakh tonne per annum with a 45 percent market share and if you take a call on white cement, it is a duopoly market. Only two players are there. One is JK Cement, second is UltraTech.

Apart from that, they have the wall putty of seven lakh tonne per annum. And in fact, the financial performance for the first half, generally cement companies are posting an earnings of about 33-40 percent in the first half and with not a significant growth having seen in any of the companies for this H1 FY18, if I really take a call. But this company has shown extremely better numbers for H1 FY18 over H1 FY17. And if I just take a call, Rs 15 EPS was last year in the first half and this year it is Rs 25.

And second half, they had about Rs 25. So if you take in all, about Rs 37-38, EPS which they have posted for FY17, they are going to end this FY18 with an EPS of abut Rs 60. Now, come on the financials. Very low equity at about maybe Rs 70 crore with a face value of Rs 10 and market capitalisation or the EV is quite low, seen at about Rs 7,600 crore as market cap and EV at Rs 9,100 crore. And that translates into cement per tonne capacity at about USD 110. But the best part is that the company has already taken up the capacity expansion to 14 million tonne and that should get completed maybe in the next 12 months or so.

And I am expecting that company has given a capital outlay of about Rs 1,500 crore which translates at about maybe USD 65 per tonne. And since the company has cash accrual of about Rs 9,00,000 crore, they should be largely have this entire capex of Rs 1,500 crore from their internal accruals. That means not by increasing the debt, keeping the debt at constant level of Rs 1,500 crore. And excellent, maybe for FY19, I will not be surprised to see the EPS moving to about Rs 78-82 which is likely to be at about Rs 58-60 for FY18. So taking all this into consideration, share is likely to give a level of about Rs 1,370 in 2018 which is now ruling at sub-Rs 1,100.

Surabhi: Coming to your next pick and that is Jaypee Infratech, very interesting, people are wondering how it will eventually all pay out to the courts and through the bankruptcy proceedings, what is the sense and what is the trigger here?

A: Take this as a wild card entry and if you really take the situation, two stocks I will quickly I am not trying to give any comparison the two stocks one is DB Realty and second is Reliance Communication. The movement we have seen any kind of favourable indications coming in either by way of favourable 2G orders DB moved up by about 60 percent in two days or three days. RComm the moment we have seen debt resolution scene happening the stock moved up by about 100 percent in this last couple of week. If I just quickly come on Jaypee Infratech the company has 165 KM Pune Expressway with a residual concession period of 30 years. Generally, in all road projects you have a total concession period of 20 years here it was 36 years of which they have completed six years so they have residual concession period of 30 years. Apart from that they have Rs 27 crore sq feet of land under development at five locations. One in Greater Noida, two parcels in Gautam Budh Nagar, one in Aligarh and one in Agra.

If you really take a call right now affordable housing is the only sector where the tax free income is allowed by the government of India none other sectors have that. Of this Rs 27 crore sq feet company has only taken up development of Rs 6 crore sq feet for which the litigation in Supreme Court is going on. Supreme Court earlier directed the JP Associates the promoter to deposit Rs 2,000 crore but then they have reduced that to Rs 550 crore of which Rs 425 crore has already been deposited. I don\'t think that Rs 125 crore being the last instalment is going to get default by the promoter that is JP Associates on January 25th. Apart from that 20 potential acquirers, you just name who is who, they are lined up to take up this company they are going to be quite aggressive because two portfolio one is Rs 21 crore residual sq feet of land under development and 165 KM.

Today if you all have read the report about 5,000 flats will be delivered by the group by March 2018 of them some of the flats are of JP Associates also some of them are Jaypee Infratech also. So, once you have any kind of resolution seen in sight coming in and you will see the stock just running up. I just gave those two examples, the way it moves up on the downside, even on a valuation kind of bases if you take say Rs 500-600 sq ft land development that is seem to be quite low. So, given a target of Rs 24 in the year 2018 but one can even keep a time horizon on the stock till 2018 to see may be higher gains more than Rs 24 also.

Surabhi: Let us come to your last pick, Cineline.

A: This is purely a real estate company and if I just go through quickly, they have nine cinema halls in Mumbai, Thane and Nasik and all are leased to PVR. So they are getting a fixed annuity income. Apart from that, they have 84,000 sq ft of saleable area booked in Kanakia Wall Street. This is again a commercial complex coming on the Wall Street concept which will get leased out by them maybe for about Rs 15 crore on annuity and the possession should be given to them maybe in the next 12 months or so. Third property which they are owning is a shopping mall in Nagpur which is 90-95 percent occupied.

The intent to monetise and the amount which is estimated to get realised is about Rs 250 crore. In fact, if you see, amongst the realty space, generally either they do not have the earnings or they are overleveraged. But in the case of this company, they have consistent EPS of Rs 4 on an annualised basis and the debt is just Rs 130-140 crore with market cap of Rs 310 crore, EV of about maybe Rs 440-450 crore. And if you take the conservative valuations because as I said, nine cinema halls are all going to get developed maybe every couple of years, one or the other property which will keep giving them the further monetisation of each property as well.

So the net present value of the property insiders or maybe the experts are estimating to be about Rs 1,250-1,300 crore, promoter stake is quite high at 70 percent. So taking all this into consideration, share now ruling at Rs 109 can be looked to have a target of Rs 136 in 2018.
CNBC-TV18
first published: Dec 28, 2017 01:08 pm
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