In an interview to CNBC-TV18, SP Tulsian of sptulsian.com shared his readings and outlook on the fundamentals of the market, and specific stocks and sectors.
Below is the verbatim transcript of the interview.
Latha: Sugar we understand the stock limits are removed do you think that sugar can be a standout performer even from their current elevated levels sugar stocks?
A: On sugar stock limit release, because if you see the situation crushing having started sometimes because you need to understand the background in which this stock limit was imposed. That was only in context to the scarcity or the closing stock seen to be very low in the month of August September and October ahead of the Diwali season when the crushing has all come to an end. Government thought of putting that stock limit of 21 percent and 8 percent over the two months that is August and September. However, I think once the crushing has started there is no meaning in having this stock limits because even if you see the stock limits which has been inforce for the traders and all that is also causing some kind of hardship to the traders which has been prevailing for last couple of years while this stock limit was imposed on the mills about three-four months back or maybe couple of months back.
I think that for both the situation on traders as well as on the mills this stock limit is meaningless and will get removed and things will be seen quite normal for the sugar industry. I won't be taking this as a positive move, merely removal of this stock holding limits, but overall if you really take the situation of the production and consumption for the coming season people are just scaring that production is increasing from 203 lakh tonne to 251-252 lakh but they forget to co-relate this with the consumption which will also be seen at 254 lakh and in the background that when we have the openings stock of less than 4 million tonne or maybe closer to about 3.5 million tonne. So, in all these backgrounds sugar continues to remain in the positive territory and in the positive zone for the next 12 months or so.
Anuj: What are your thoughts on cement stocks, do you get a sense that there could be a bigger bounce in some of these or do you think there could be more correction at higher levels?
A: We are keeping extremely positive view on cement stocks because if you really take the situation going forward, the kind of consumptions and the kind of infrastructure increase which we have been seeing happening and more specially in the northern region, if you take the state of UP, you are going to see extreme, huge amount of construction and infrastructure development seen happening. Take the western corridor of the dedicated railway freight corridor, the housing boost across India, pan India, and in fact, the best part for cement is that they can only cater to region of about 150-200 kilometer.
While the capacity addition has not happened significantly in this last maybe couple of years, in fact we have seen huge consolidation, the weak hands having gone in the hands of the strong hands, case in point is Jaiprakash Associates which was having a capacity at one time of 35 million tonne, and now got reduced to about 8 million tonne; 22 million tonne having gone to Ultratech Cement. If you take Aditya Birla, BK Birla Group combined, having a capacity of 130-140 million tonne out of the total installed capacity of 430 million tonne in the country, so, I think the consolidation and the growth, the expected growth, consumption growth for the cement for this financial year is seen to be at 6 percent which I won’t be surprised to see it rising to 8 percent for FY19.
So taking all this into consideration, not much of the capacity additions having happened, huge infrastructure growth and the kind of consolidation having come in the hands of the strong people, or maybe the strong promoters, we have in fact been keeping a positive view on the cement stocks going forward and more specially on the northern based or centric cement companies, those who are in the states of Andhra Pradesh and Telangana. So these are the pockets where we are keeping extremely positive view and overall positive view on the cement sector going forward.
Latha: Your big long term bet?
A: My today’s stock is from the cement sector on which we have discussed a while back. The stock is JK Cement and if you really take a call on this stock and there are about 45-50 companies available in this sector. But I think you can compare this company in terms of the profitability in terms of the financial structuring with any larger companies maybe like Shree Cement or maybe like Ultratech Cement or may like Ambuja Cement. If I just quickly go through it the company has a capacity of 10.5 million tonne of grey cement capacity and the management is expanding the capacity to 14 million tonne which should get completed in next 18 months with a Capex of about Rs 1500 crore.
Apart from that, in case of the white cement it is a duopoly market. There are only two players that is JK Cement and Ultratech Cement and JK Cement is commanding a market share of about 45 percent with a capacity of 6 lakh tonne per annum of white cement plus they have a white putty capacity also 7 lakh tonne per annum and both are contributing significantly to the profitability of the company. If I just quickly go on to the first half performance of the company turnover rose to Rs 2,370 crore from Rs 2,140 crore with EBITDA rising to Rs 452 crore from Rs 348 crore that means EBITDA margin has expanded to 19 percent plus from 16 percent plus. A clear jump of about 300 basis points increase over a year-on-year on H1 FY18.
An earnings per share (EPS) has been Rs 24.67 for first half of FY18 which was at sub Rs 15 in the same period last year. If you take a call on FY17 EPS it was at Rs 37 while the EPS for FY18 is expected to be at about Rs 56 because the company having already earned an EPS of about Rs 25 in first half second half is always better. We are expecting about Rs 31-32 EPS in second half, so that will give about Rs 56. Equity is very low at Rs 70 crore with a face value of Rs 10, promoter’s stake is at 64 percent.
The debt is just at Rs 1,500 crore and as I said that the company is carrying out an expansion of about Rs 1,500 crore to ramp-up the capacity I think that maybe in next 18 months the cash accrual of the company which will be to the tune of about Rs 800 crore will partly meet this Capex. So debt-equity ratio will very much remain within less than 1:1 market cap is just at Rs 6,900 crore. EV per tonne on the grey cement capacity works out at USD 105 per tonne. Promoter stake is at 64 percent so taking all this into consideration. Share now ruling at Rs 985 can move to a level of Rs 1180 in next six months or so.For full interview, watch accompanying video...