Here are fundamental trading ideas from SP Tulsian

Coming specifically on Aurobindo Pharma, I won’t be taking a near term view inspite of the US FDA approval. However, we continue to remain positive on Aurobindo Pharma as the best pick amongst the pharmaceutical biggies and need to have a view of about maybe 10-12 months or so.

Latha: What is your take on Hindustan Unilever (HUL)?

A: Numbers are definitely good inspite of the no quantity growth seen because if you really see for the last 20 days, about three weeks, practically in every field you talk of FMCG or you talk of consumer durables, or even you talk of sugar, the destocking was happening. I think that in that scenario, because April and May has been the robust month for the entire economy, but June is seen a dampener and inspite of that the numbers are seen good.

However, I won’t be taking, because this is what I have been saying for a while that ITC and HUL, because if you really need to outperform or if you really want to earn in the market, you need to look for the lower than richly valued stocks and definitely amongst the FMCG space, we have other preferred picks like maybe first choice goes with Godrej Consumer, second could be GSK Consumer, and third could be Britannia.

So, inspite of good numbers having posted by HUL, we won’t be keeping a buy call on the stock inspite of the potential for the share to move up in the near term.

Reema: We spoke about UltraTech Cement yesterday, but post market hours, we got the details of volume growth and it was the fourth straight quarter of flattish volume growth for UltraTech Cement. Does it dampen your optimism?

A: No, not at all. If you see the volume growth, the volume of about 30 million tonne having achieved in Q4, in fact we all knew, in fact if you go through that presentation, the utilisation of 77-78 percent for the existing capacity, plus the 15 percent utilisation for the Jaiprakash Associates cement assets which they have acquired for Rs 22 million, will really be a kicker. I don’t think that market should be too worried for the historical data because inspite of that, those kind of numbers have all been seeing quite good.

Yesterday also I have said that because the integration or the effective takeover of Jaiprakash Associates assets have happened from June 29, the effect of that will be seen from here on for the remaining nine months of FY18 and maybe barring for this next couple of months of monsoon, the situation or the outlook for the cement sector is looking quite good. I am not disturbed because if you really see the situation, they have the presence of about 67 percent capacity in the Western and Central region of their total capacity of 93 million tonne.

So, taking all this into consideration, I am not at all disappointed with the numbers, I am not disappointed because if you really want to take a call, you need to see the futuristic things and 15 percent capacity utilisation seen in the Jaiprakash Associates will be giving them huge operating leverages because of the good brand UltraTech enjoys which practically is the preferred choice for all the bigger end industrial projects.

So, I am keeping a positive stance, but not at the current valuations. Stock may see some corrections, it may correct to a level of Rs 4,220 which makes a good entry point at that point of time.

Anuj: Let us discuss the stock idea of the day. Haven’t heard much about this stock, Lakshmi Electrical Control, is this part of the Lakshmi Machine Works Group?

A: Yes, this is a part of Lakshmi Machine Works Group. If you see this company is making the control panels and engineering plastic materials. Now, amongst the control panels, they are not making high voltage, they are only making medium and low voltage. Engineering plastic machines they are supplying largely to their group or their parent i.e. Lakshmi Machine Works.

First let me take on the financials. The company is consistently posting robust numbers with EPS which never fell Rs 30 if you take in the last maybe three to five years. The dividend payment has been consistent with 50-80 percent; the latest being Rs 8 i.e. 80 percent. For FY17, company posted an EPS of about Rs 36 on a topline of about Rs 165 crore, PAT of about Rs 9 crore.

This PAT if you see, FY17 has been little subdued quarter for their core business i.e. electrical segment. Their EBIT for electrical segment has been at Rs 7 crore in FY17 against Rs 11 crore in FY16. While their plastic engineering division has shown a very good number. EBIT Rs 1.5 crore against Rs 15 lakh of FY16. So, what I am expecting is that engineering plastic division is going to keep this momentum going but the electrical segment business will see the return of the old EBIT of Rs 10 crore plus maybe in FY18 or FY19.

Now, if you take the situation, the financials of the company, it is a debt free company. Rs 2.5 crore paid up equity with face value of Rs 10 i.e. 25 lakh shares only. So, market capitalisation of Rs 135 crore. Now, Rs 135 crore has Rs 35 crore cash lying in the balance sheet which are lying in the fixed deposit and the liquid funds of various mutual funds. If you knock that off, it gives you an EV of Rs 100 crore.

Apart from that, the company is holding 89,000 shares of Lakshmi Machine Works having book value of less than Rs 1 crore but market capitalisation of Rs 47-48 crore. I won’t be taking that as a clear total valuation, but if you have an EV of Rs 100 crore backed by Rs 48 crore Lakshmi Machine Works shares, you get the entire company at about Rs 50-52 crore.

They have their manufacturing plant in Coimbatore where they have ample or surplus land of about 60 acres. If you see the two shareholders, which are prominent, one is, Hafeez Contractor is holding some shares, maybe 10,000-15,000 shares and Gagan Chaturvedi, the ex-partner of Antique, he is also holding shares. So, probably, if one can read anything between these shareholding, probably it indicates that company may be looking for development of the surplus at Coimbatore which is again estimated to be having a value of about Rs 300 crore.

However, I am just speaking on the core working performance, topline for FY18 I am expecting at about Rs 175 crore with EPS of closer to about Rs 44-45. So, if you knock that off, the cash surplus only, you get the P/E multiple of maybe about 8-9 times while the industry peers are all ruling at a P/E multiple of 18-20 times. As I said that EV is Rs 100 crore, if I take the net present value of these shares and land and all that, the net present of value gives me Rs 500 crore.

So, taking all this into consideration, I think there is ample margin of safety and company has a good potential to move up from here. Share is now ruling at Rs 548, I have given a target of Rs 685 in next six months or so.