In an interview to CNBC-TV18, SP Tulsian of sptulsian.com shared his readings and outlook on the fundamentals of the market, specific stocks, and sectors.
Below is the verbatim transcript of the interview.
Anuj: Thoughts first on NCC since it has been the stock of this series.
A: NCC is looking good maybe in view of the revival of the infrastructure projects and all that, the awards which have started seen coming in. However, having run so much, maybe by about 10 percent, in this last maybe one week or so, I think that stock needs to take some pause. Maybe this expiry issues, technical factors are making it move up higher, but may see some kind of corrections once the new series starts.
Surabhi: To take this point forward, we were in conversation with an analyst earlier, and one viewpoint we got from the market was the reason this time it might be different is that a lot of these contractors are now sitting on big order books with good visibility, with better balance sheets, and that is not we had back in 2007-2008 where the issue was huge amount of leverage and debt. What would be your pecking order if you are looking at EPC players, road contractors?
A: Firstly, I don’t think that this is a right statement that they have the clean balance sheet because if you take the situation of 2007-2008, in fact all of them have just started taking those contracts and came on the capital market scene at that point of time with a clean slate. If you really take a call now, the mistake which EPC players did that they have gone into BOT and BOOT contracts and have leveraged their balance sheet or stretched their balance sheet to a great extent, and those baggage’s are still seen being carried out by them in their balance sheet of today.
Now, if you really take a call, there are 40-50 companies in this space those who have been doing this work but some of them have migrated into the building construction and development, maybe like Ahluwalia Contracts and all that. So, it is very difficult to just generalise now that which all companies will stand to gain because it all depends on the contracts having received by them. However, the only point of caution here is that one should not look for absolute number or the total value of the contracts because earlier that used to be yardstick or barometer that if the company is having a contract of Rs 50,000 crore or Rs 20,000 crore. It is the execution capability which really matters, number one, and number two, is the joint venture because in the past two or three companies having joined hands with a specified sharing ratio, on the ground the picture were totally different because some of them were just taking the premium element of their share and the entire project was executed by the so called majority or maybe one of the partner those who have bid for the project.
So, it is a very difficult point of analysis to take a call on each company. So it is very difficult to give a pecking order but yes some of the companies are looking good maybe in this space, likes would be KNR Construction, NCC. It is a very crowded space and one has to really start scratching and analysing such companies looking to their debt positions.
Latha: Yesterday we spoke about Bhansali Engineering and I remember that you had recommended it even in July and of course it has gone through the roofs since then. I was looking at another product another stock that you had recommended Banco Products (India) even that is quite a performer now. Would you want to reiterate that as a recommendation?
A: We have been in fact keeping our continuous buy call on Banco Products. It is an auto ancillary and if you really see the cooling space which they cater to is seen to be having lot of potential. In fact Q1 number of the company were bit dull and that is always the seasonal element which we see with the company. If you really take a call this has been a cash rich company they came out with the hefty dividend for FY17 and same thing is likely to get repeated because company earlier have dropped their plans of buyback. So, yes, we are keeping a positive view on the stock with a long term view maybe of about one year or may be couple of years, still upside seems to be from hereon.
Anuj: What is your long term stock call?
A: My today's stock is Ineos Styrolution. In fact I have picked up this stock intentionally because yesterday we have discussed a lot about Bhansali Engineering Polymers because if you really take a call, this is a duopolistic market where only two players are existing for the Indian market and both are virtually having the same capacity of ABS which is again used in the engineering and automobile sectors and all that.
However, quickly if I just make the comparison between two stocks, it is not that we are not keeping a positive stock on Bhansali Engineering having recommended at a price of about Rs 20, 18 months back and thereafter on many occasions, but quickly if I just go through and run, Bhansali Engineering is having a face value of 1 and Ineos is having a face value of 10. Ineos is having a multinational promoter, Bhansali is having an Indian promoter, promoter stake for Bhansali is at about 54 percent, while in case of Ineos it is 75 percent.
If I just first focus and there is no point in taking FY18 estimated earnings, if I just focus only on the H1 FY18 topline, Ineos had a topline of close to Rs 1,000 crore, while Bhansali Engineering had a topline of about Rs 550 crore. If you take their core business of ABS, both are having virtually the same capacity of 80,000 tonne per annum. Both are operating at a capacity of 90 percent and both are carrying the capacity expansion to about 1,20,000-1,30,000 with a capex of about Rs 130 crore.
If you take the status, both are debt free. If you take a situation only on the Q2 numbers, here it is very important to take a look on these Q2 numbers, the growth of the bottomline has been phenomenal for Ineos Styrolution because if you take a call for overall H1 FY18, Ineos had an EPS of closer to about Rs 11.21 of which Rs 9.65 came in Q2 and Rs 1.6 came in Q1; that means that there has been a significant improvement in the margins and which we feel that it is going to be sustainable. However, in case of Bhansali Engineering, Q2 EPS was Rs 1.51 and Rs Q2 EPS was Rs 1.05. So as I said, that if you take the market cap also of Bhansali Engineering Rs 2,900 crore and Ineos it is at Rs 1,850 crore.
So taking these as a comparison and I am not taking much of this one because equity of both are same, almost at about Rs 17-18 crore, only thing that Bhansali Engineering is at Rs 175, effectively Rs 1,750 if I convert to the Rs 10 valuation. So taking all this into consideration, Ineos Styrolution looks to be very good looking to the parentage, looking to the expansion, looking to the product demand and all sort of things with a target being given by us at Rs 1,230 in next six months or so.
For full interview, watch accompanying videos...
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