Emkay on Britannia, Tata Steel & Amara Raja

Dhananjay Sinha of Emkay Global Financial Services in an interview with CNBC-TV18 spoke about stocks and sectors. He said there have been innovations in Britannia in terms of product portfolio and there has been an expansion in the Hindi speaking belt. It has been expanding in volume and from a structural standpoint. That has been panning out well over next few years that should continue. “We see 10 percent volume growth CAGR over the two-three years CAGR.”

On Tata Steel, he said that the stock has run up 70 percent in the last 6 months. The target price is Rs 300-305 and he has a sell call on the stock. "Some of the specific things is coking coal prices have gone up in the recent past. It has doubled. That is one thing that should have an impact on the margin growth. Overall steel production has risen by 8 percent.”Below is the verbatim transcript of Dhananjay Sinha’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.Anuj: The stock that has taken it away for the last 2 or 3 years is Britannia and you are still backing it at current levels?A: Yes, basically our view has been consistent and it has been playing out. It is largely in the context that there has been innovation as far as product portfolio is concerned and there has been an expansion across the Hindi speaking belt specially in the northern side and that has been expanding the volume and also sort of from a structural stand point improving the margins for the company. So, that has been panning out well and over the next few years that should continue and there is a certain amount of cost benefit that they have derived over the recent past because of softening commodity prices and also that the milk inflation has been under control. So, all those things have been adding to margins.The key issue is that the company is stepping into areas where they were not existing and they have a powerful brand portfolio to increase market share in newer area. So, all of that has been supporting the earnings growth and we believe that there will be a margin expansion over the next few years. So, we are expecting 10 percent volume growth compound annual growth rate (CAGR) over the next 2-3 years and that should support our revenue growth of something like 14 percent or thereabout.Latha: You have such a good list of stocks that I want to hurry with as many as possible. Amara Raja Batteries Limited, Cholamandalam and Aurobindo Pharma have all gained a significant bit, you still back them?A: Yes. If you look at the earnings trajectory, if you look at the BSE 500 or even Nifty, what we believe is that earnings growth are confined to certain stocks and if you look at Q1, this year the earnings growth has come down again. If you look at the overall index, it has been in the negative territory excluding bank and oil and gas it is a modest growth. So, earnings growth trajectory has been fairly modest.In that context many of these stocks, which have a good visibility even in the current context they are growing in the region of 15 percent plus or minus 2-3 percent, that is an area where the markets would go and some of the stocks that we have identified have good visibility. So, that is where we would want to place our bets.I understand that there are concerns on valuations because markets have run up quite significantly over the past six months. So, those concerns will be there but these concerns are largely on the back of the fact that we typically end up comparing against historical averages and we are seeing a step up in these valuations over a period of time.Anuj: Your call on Tata Steel. You have a sell on that which right now is a bit of an anti-consensus?A: Yes, that is a contrarian view. The stock has run up almost like 70 percent over the last six months. So, currently at Rs 380, our target price is somewhere around Rs 300-305 levels.The key concern over there is that while some of the numbers have improved the stock price has run up quite a bit but overall we think that some of the specific things out here is that the coking coal price has gone up over the recent past. In the last two months it has almost doubled. So, that is one thing that should have an impact on the margin front.If you look at the sales growth, it is flattish and if you look at the overall steel production, it has risen by almost 8 percent. If you look at the industry aggregate and consumption has just risen by something like 1.6 percent. So, from that standpoint, there is a sort of concern we have with respect to the next 2-3 quarters.Numbers -- there are issues with effect to Europe as well. There have been improvement in the last quarter but we are not sure whether that is sustainable. So, there is some uncertainty out there. There is a good amount of debt that is there, roughly about Rs 75,000 crore on the balance sheet. Increasingly we are finding mobilisation of funds becoming somewhat difficult. So, overall there is some concern from valuation standpoint and also from near-term triggers.