In an interview to CNBC-TV18, SP Tulsian of sptulsian.com shared his readings and outlook on market and specific stocks.
Below is the verbatim transcript of the interview.
Sonia: I wanted to check with you on this whole crude theme because now it is officially in bear market territory. Any incremental upside you see on any of these sectors like aviation, paints, tyres, etc.?
A: I think this is extremely positive for India and there are not one or two sectors, there are umpteen number of sectors which will stand to gain from this. Apart from the economy having the advantage of lower crude, and having good growth, and lower cost of production, and you are right, if I just start naming the beneficiaries, you can add aviation, tyre, paint and apart from that, a lot of petrochemical companies which are into making the metal substitutes for automobile like two of our recommendation Multibase and Kingfa Science and Technology, I am just giving these few examples.
In fact everything is now getting substituted by the petrochemicals. If you take the situation in the rubber front, natural rubber is getting replaced by styrene-butadiene rubber (SBR). Similarly as I have said, metal is getting substituted with polypropylene. Even if you see the polyurethane forms which is the cushion material used in the households, or use in the automobiles and all that where the polyol and the polystyrene because polyol is converted into polystyrene and polystyrene is a raw material for that. So, there are umpteen number.
In fact if you start tabulating the names of these companies that who will be beneficiaries with the falling crude, I think you will get 100-200 stocks as worth investments at these levels. So I think that the things are extremely positive. Crude weakness may be sounding negative for the other western countries, but we should not get bogged down merely because the whole global market and Asian markets are seen ruling weak on the crude falling because that always happens there.
However, that situation is totally different for our country, we should really cheer and celebrate with the fall of crude and that is what exactly will happen going forward, may not happen for the day, but it will be seen extremely positive for our economy and for our stock markets.
Latha: On the key stocks itself, is there anything that is still appealing to you in the airline space, tyre space, or in the paint space more importantly where already there has been a goodish bit of rally?
A: I have been giving a buy call on SpiceJet followed by Jet Airways. These are the only two ideas which are looking very good in the airline space. We have been keeping neutral to cautious view on Interglobe Aviation since it went public.
Coming on the paint, yes, we have practically -- in fact there are only five to six companies listed on the stock exchanges available in that space and if you see the unorganised or maybe the goods and services tax (GST) implementation, that will be seen extremely positive for this paint sector. If you again see the situation, all these paint stocks are ruling at a P/E multiple of 40-45. However, merely taking a call on any paint stocks on the earning basis may not be right. In fact you need to see the net present value also.
So, we have been keeping bullish view on Asian Paints, Berger Paints, Kansai Nerolac, but we have been keeping extremely positive view on Shalimar Paints also because the kind of turnaround, revival of two plants by them, one at Nashik and one at Hooghly near Kolkata and apart from that the rights issue of Rs 50 crore virtually debt free company. Except for that, Q4 was a disappointment which was more seen as a cleaning of the books and the promoters have already infused Rs 20 crore as the advance against the rights issue which they will be subscribing of that 62 percent stake.
So, on a net present value basis, Shalimar Paints is available at EV of about Rs 400-450 crore because as I said, on a net of working capital, this is a debt free company. I don’t think that if you have any kind of change of buyer or improvement in the performance of the company, I think the valuations can easily show 100-200 percent growth. In fact we have been giving a buy call on the stock when it was ruling at around Rs 50-60 three or four years back, and now it is ruling at around Rs 250 and still we hold extremely positive view. However, as I said, positive view on all the paint stocks but preferred pick will be Shalimar Paints.
Coming specifically on tyre stocks, as I said, the reduction in the crude will eventually see the synthetic rubber prices also falling. However the kind of valuations, the rich valuations which we have been seeing in this tyre space, I think that I will be taking a cautious view, maybe sentimentally if you see the natural rubber prices falling which has also been correcting because if you have the substitute available, the synthetic one, then obviously the natural rubber prices also will fall. So, maybe on that account, that could be a sentimental reason.
However, purely on fundamental, I won’t be taking a call. However, yes, as I said, maybe some other unrelated ideas which are all looking quite good, two amongst them I have already said, Multibase I think I have recommended couple of weeks back and second could be Kingfa Science and Technology, so, there are umpteen number of stocks available which one needs to identify and look for the performance and the product mix they are making.
Sonia: The stock that you have identified for us today comes from a great pedigree, the TVS Group, Sundaram Brakes and this is a stock that has given a lot of wealth to investors over the past couple of years. Do you see more on the anvil?
A: Yes, I see much more and in fact if you see the turnaround, it is a classic turnaround. Before coming on the financial performance, let me just give you the technical background; the company is having five manufacturing plants and they are making asbestos friction material for automobiles and for railways and non-automotive segments. This is the only company in the world having received the Deming award prize which is given by Japanese scientists and Japanese engineers, committee constituted by them for developing this product of 100 percent asbestos free.
This is the only company in India making asbestos friction material. So, five manufacturing plants and if you see the classic turnaround which has happened in FY17, company had a constant topline of about Rs 245 crore in FY17 as well in FY16. However their operating profit has risen by about 270 percent, operating profit risen from Rs 1.13 crore to Rs 4.18 crore and I am not going into the PBT and all that. Inspite of providing for VRS about Rs 1.5 crore in FY17, company posted an EPS of Rs 4.5 for FY17 against loss of Rs 1 for FY16.
If you see the main crux or the valuation call which I am giving, first is classic turnaround case. Five manufacturing plants are all located into prominent cities and near port because to cater to all the OEMs and all that, the company is maintaining the just-in-time concept. If you see the net present value of the company now, it is at about Rs 180 crore because it is a debt free company. The market cap of Rs 180 crore is the enterprise value also of the company. So, if you take the net present value probably it may run about Rs 600-800 crore and you can say that the comparable peer, may not be on the financial performance is Rane Brake Lining.
In fact if you recall, we gave a buy call on Rane Brake Lining when it was ruling at around Rs 500 and now it is ruling closer to about Rs 1,300, having risen by more than 150 percent in less than six months or so. So, similar the comparable peer for the stock is Rane Brake Lining and if you see the situation, they have a very good sate of the art in-house R&D and design facility which is a crux of any of these brake lining makers and now it is a 100 percent owned on the promoter front because it was earlier a joint venture (JV) with M&C company which previous group had brought and now they are holding stake of about 66 percent in the company.
So, we are extremely positive and I think the turnaround which was seen in FY17, will keep showing the accelerated growth on the margins going forward. So, maybe share now ruling closer to about Rs 450, we are giving a target of Rs 565 in six months but those who wish to keep it for couple of years, can look to see the shares moving up much higher from here.
For full interview, watch video...
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