Watch the interview of SP Tulsian of sptulsian.com with Surabhi Upadhyay, Anuj Singhal, and Reema Tendulkar on CNBC-TV18, in which he shared his readings and outlook on market and specific stocks.
Below is the verbatim transcript of the interview.
Reema: What are your thoughts on the market, do you think we are at the start of the first real correction that we have seen in the last seven or eight months given the internals that we have seen with the banks collapsing, the midcaps underperforming?
A: I don’t think so that this is a start of the correction. In fact maybe the overbought positions which we have seen in many stocks and the market and you can say that some kind of complacency and what we have seen in case of May series when last four days, we have seen the liquidations having taken place, lot of cash shares to finance the losses, the shares of the retail traders got sold. In fact yesterday also when we checked with the top brokerages and all that, they have liquidated a lot of long positions and I think probably that situation may continue for today or maybe maximum tomorrow.
However, I don’t think that the situation is going to get elongated for the July series for the simple reason that the goods and services tax (GST) confusion which is prevalent is seen to have happened in most of the cases because all the distributors and retailers are going for destocking. If you go into maybe Big Bazaar kind of things, you will find half the shelves are occupied. That means the destocking is happening and once that happens, again in the first week of July, you will see the huge order inflow seen coming in at the manufacturer’s level. So, that probably has not got calculated or factored in by the market, so, I am not keeping a negative view.
This is just the effect of the overbought positions which we are seeing getting liquidated. If you see the high beta stocks, yesterday also I have said in the afternoon that the high beta stocks like maybe Escorts, BEML kind of stocks are seeing more beating because people have gone complacent on those stocks and have made a lot of long positions. So, this correction is seen to be quite healthy and in fact I am keeping a positive view on the July series going forward.
Anuj: The sector I want to discuss with you is oil and gas. Yesterday was quite curious, we had big decline in BPCL and HPCL but Indian Oil Corporation (IOC) ended at high point of the day and there was some buying in Gail as well. Was this a just random move, what explains that, and would you look to buy the oil marketing companies (OMCs) after the kind of dip that we have seen?
A: Day before I said that Gail makes a good buy at Rs 350. At that time it was ruling at around Rs 354-355, two days back. I don’t know what was the closing yesterday. In fact in my view, all three OMCs qualify as a good buy. In fact we have initiated a buy call on HPCL today because if you see the situation now at Rs 500 -- if you ask me, there has been two or three confusions.
First in respect to the dynamic pricing having effected by this OMC on a daily basis which in fact should be seen as a positive because I don’t think that that will give them inventory losses and all sort of things. Secondly there was confusion in respect to the conventional fuel getting phased out which is not going to happen at least for the next two decades; don’t expect that the electric vehicles will come from tomorrow and you won’t be requiring diesel and petrol. So, yes, the situations were sentimentally seen weak for all these stocks, and in fact the gas stocks also equally have taken a hit, as you have said about Petronet LNG, Gail.
However, going forward, as I said, two days back we have given a buy call on Gail that it qualifies a good buy at Rs 350 level. I don’t know the closing yesterday but even going into the OMCs also, we are taking a positive call on HPCL at a level of Rs 500 because share is also going ex-bonus in the next couple of weeks with the date having announced. So, I think that Rs 500 with 50 percent bonus inbuilt therein and the kind of performance, share is now ruling at a P/E multiple of 8, I am not saying that P/E multiples are too relevant for the OMCs, but I think that their marketing margin is going to remain intact and I don’t see much downside from here on and would definitely be giving a buy call on Gail and HPCL going forward.
Surabhi: Another stock that we have discussed with you recently as well, Fortis Healthcare. The fresh news now is that all approvals from creditors, etc. are through for this three-way demerger. The hearing is tomorrow in the National Company Law Tribunal (NCLT). Given how much the stock has fallen, how should one approach it now?
A: I have been keeping the neutral to cautious stance on this. I agree that the three-way demerger and all that, the legal or the judicial process is seen to be coming to an end. However, it is a matter of valuation and I don’t think that I will be too comfortable.
In fact I have been cautioning earlier also when things were all seen getting built up on Integrated Healthcare Holdings (IHH) news and things are not very comforting. Valuations are still looking too stretched, the kind of expectations which the promoters have and the kind of comparative valuations, maybe like Apollo Hospital. So, I won’t be taking a comfortable valuation call on the stock going forward.
Reema: Let’s come to one of your recommendations which has been Harita Seating for a while now. You have been recommending even when the stock was below the Rs 200 mark and now it is over Rs 700. From here on, what is the upside that you see in Harita Seating?
A: Yes that is right, in fact we have been initiating a buy call and it continues to be our quality investment portfolio stock which one can always keep into the stock and still we see good upside. Now let me just give you the background or the business model of the company. Company is into providing seating solutions to trucks, tractors, buses, and off-the-road vehicles. They have six plants in India and if you see the six plant location, one in Uttarakhand, one in Maharashtra, one in Karnataka, one in Tamil Nadu, one in Jamshedpur in Jharkhand, that means catering to each automakers and they have their clientele.
Apart from that, they have one 51-49 joint venture (JV) company, 51 percent stake is held by Harita Seating, that is Harita Fehrer, it is a joint venture with a German company who are making polyurethane. Polyurethane is used as a seating solution, the foam material and they are the largest foam maker in India and they also have three plants, again at three different locations and catering to other seat makers as well as to the in-house things also.
If you see the financial performance of the company, it has been really fabulous. If you take a consolidated financial performance of the company for FY17, they had a topline of Rs 790 crore with operating profit of Rs 53 crore that means operating profit margin of 6.7 percent. If I just give you a comparative, the next comparative play, you don’t have much in the organised play available or maybe into the listing space any stocks available in the seating space, the next comparable is Bharat Seats.
If I give you the comparison, Bharat Seats had a topline of Rs 935 crore against Harita Seating Rs 790 crore, Bharat Seats had an operating profit of Rs 21 crore while Harita Seating had operating profit of Rs 53 crore. That means operating profit margin of Bharat Seats has been at 2.3 percent, while Harita Seating it is 6.7 percent; almost three times of the operating profit margin and the reason being that Bharat Seats caters to two wheelers while Harita Seating also earlier used to cater to two wheelers vehicles also which they have closed the plants couple of years back at Rudrapur, they are now only focusing on the high value margin i.e. buses, trucks, tractors, off-the-road vehicles.
If you see the situation, very low equity of Rs 7.77 crore, net worth of Rs 120 crore, it is a debt free company with market capitalisation of just Rs 550 crore. Even if I go on an EPS basis, EPS is of about Rs 37 on a consolidated basis, promoter stake 67 percent, institutional holdings and HNIs are holding 15 percent. It is a TVS Group company and TVS Group companies if you see on the bourses, they always enjoy the higher P/E multiple. However here, in case of Bharat Seats, the P/E market is giving off 22 while Harita Seating is enjoying a P/E of 19-19.5; I am taking it on historic earnings. So I think that there is a lot of margin expansion as well as P/E expansion likely to be seen in case of Harita Seating.
As I said, the subsidiary company equally gives equal operating profits margin. If you break this Rs 800 crore topline at the operating profit of Rs 53 crore, practically it is 50-50, Rs 400 crore from standalone, and Rs 400 crore from the joint venture. Similarly is Rs 23-24 crore operating profit from standalone, and Rs 26-27 crore from the JV company. So, taking all this into consideration, I think the stock has limited upside, but it can give you a very good return and can be termed as a portfolio stock even for three to five years. However, I have taken a target of Rs 900 on the stock in next six months.
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