In an interview to CNBC-TV18's Anuj Singhal and Surabhi Upadhyay, SP Tulsian of sptulsian.com shared his views and outlook on the fundamentals of the market and specific stocks.
Below is the verbatim transcript of the interview.
Anuj: What have you made of this stunning move on IndusInd Bank? In the morning, did you think we would have this kind of move on IndusInd Bank and of course, Bharat Financial Inclusion? Your thoughts on how the market has responded to the deal?
A: Market is taking this as a very positive for IndusInd Bank and very rightly so. If you really see, both the stocks have risen by about maybe 4-5 percent. If you would have seen IndusInd rising by 5-6 percent or Bharat Financial Inclusion rising by 10-12 percent then we would have taken a different kind of analysis that probably the swap ratio is coming in a more favourable way for Bharat Financials. But it is not happening in that way because eventually, if Bharat Financial has to get merged with the IndusInd Bank which has been confirmed by both the management, by Mr Sobti as well as by Bharat Financial's CEO and MD also. So both the shares have to move up in the same direction, number one.
Number two, this is definitely seen positive for the IndusInd Bank per se because of the increase in the branches and increase in the banking customers apart from the benefits which they will be enjoying in the form of the higher net interest margin (NIM) which is enjoyed by Bharat Financial and the huge rural base and rural penetration and all that. If you are paying Rs 13,000-14,000 crore for a company to have that kind of reach of about 65 lakh customers and all that, that will be seen quite positive.
Now come on the swap ratio. If you really take the situation now of the present price, if I take Rs 1,800 and Rs 975, the swap ratio comes to 5.4. but in the morning also, I have said that always the merged company which is getting merged, here in this case, it is Bharat Financial is going to get merged with IndusInd Bank. So always the company which is getting merged rules at 5 percent discount at least because this whole process will take about 4-5 months minimum and in that situation, that discounting always prevails for the company which is for the stock or for the company which is getting merged.
So here if you take 54 percent as the swap ratio, derived on the current market price, knock off 4 percent as the discount which eventually has to prevail in case of the share price of Bharat Financial, you work out on a swap ratio of one share for every two shares, one share of IndusInd Bank for every two shares of Bharat Financial because now the speculations are going on whether 0.6 share of IndusInd Bank will be issued for every one share or maybe even 0.7 on the optimistic.
But I have been maintaining in the morning also I have said that I am seeing half share getting issued and that will eventually see the dilution of the equity by about 11-12 percent which will be seen very positive for the IndusInd Bank to straight away ramp up their business going forward by acquiring Bharat Financial Inclusion.
So if both the shares are moving in the same direction with the same rise of 4-5 percent, I do not think that there is anything coming differently on the swap ratio whether taking 0.6 or 0.7 can be seen as raising the bar. But that is not seen getting reflected or factoring in by the market. So yes, overall positive for IndusInd Bank and that is why we have seen both the stocks up by about 4-4.5 percent as of now.
Anuj: Your thoughts on the way power stocks have moved and anything in particular that you would want to play in this power sector?
A: I am not keeping positive view on the pure power generation play like maybe Tata Power, Adani Power. But Torrent Power, we have discussed in the past that there are two companies Torrent Power and CESC who are into the integrated operations. They are into generation, they are into distribution as well.
So similar is the case for Torrent Power. They are the power distributor in Surat, Gandhinagar, Ahmedabad, Agra, Bhiwandi and those things are giving them, but if you really see the financial performance of the company maybe for the last 4-6 quarters, that has not been to the mark, maybe in the year FY16, the company has posted excellent numbers, but for the whole of FY17 and maybe Q1 of FY18 has really disappointed on the Torrent Power front.
But maybe if you have these type of integrated operations, the way we have seen the corporate moves or maybe the restructuring by the management in case of CESC, if those kind of things, moves happen though I do not support those kind of moves because ultimately, the integrated operations only will be really seen beneficial for the company in the long run, but if you see that kind of restructuring move, sometimes, market gets enthused with those kind of moves and probably that could be the reason for Torrent Power to move so much up today.
Anuj: PTC as well has been one of your favourite stocks. More room to go here?
A: Yes, more room to go because if you see, after the, which I have been infact we have been giving the buy call on PTC since it was ruling in two digits and if you see, this is only power exchange and the kind of investments which we have seen in transmission and distribution (T&D), the consumption is going to go up. The power costs having come down so much, that will be seen quite positive for PTC because they are the power trading exchange and in fact, they have their subsidiary PTC India Financial Services, which is 65 percent subsidiary, even that is doing quite well.
So if you take their overall financing portfolio through their subsidiary and their own power trading business, that is seen to be quite beneficial because more power offtake at the lower price will be having an improvement in their trading business or maybe in their core business of power trading.
Anuj: What is your view on Reliance? The stock has run up a lot, at multi-year highs now, after we started to see the underperformance getting corrected, but would it be a good time?
A: I am keeping positive view because Q2 numbers are going to be seen quite good because of the refining margins Singapore benchmark having moved up to an average of about 7.5 and now ruling closer to or maybe in double digit. Even if you see, their Reliance Jio business, 13,000 crore subscribers have already been reached and even if you see Reliance retail, even there the sum of parts valuations will definitely be seen incremental valuations coming in because of the increase seen in Future Retail and Avenue Supermarts.
So, taking all this into account, share now ruling ex-bonus Rs 820-822 can be a good point. If he wants to wait then maybe Rs 10-15 fall can be seen, but I do not think that that wait will be worthwhile. So he can buy Reliance Industries now at Rs 820-822.
Surabhi: What is your view on Advanced Enzyme Technologies?
A: They are into the neutraceutical space and when the company went public, we have extremely positive view. But if you really see the financial performance or maybe the valuation or the kind of volatility for the last six months or so, I do not think that that has given the stability and maybe cool behaviour to a prudent investor. So taking all this into account, since this investor has bought at about Rs 290, now the stock is ruling at around Rs 295-296, I advise him better to shift from here and look for other stocks. And now point in remaining invested in Advanced Enzyme.
Anuj: What is your view on Future Consumer?
A: The opportunity has come and gone. There is no point in chasing the momentum and that too after seeing having risen by about 100 percent in this last 4-6 months. So, definitely no point though one may get about 10-15 percent. But if you get trapped at the higher level then that is equally painful it will be. So my advice is that yes, remain away from the Future Group stocks for the time being as of now.
Anuj: Thoughts on Larsen and Toubro? What is the market factoring in with the kind of move that we have seen?
A: I think it has to do with the management commentary where they have given a very ambitious targret of order inflow to be seen in the defence play because if you really see market has never factored in that kind of order inflow, but the new CEO and MD has been very categorical and very ambitious. People have been taking positive view on the defence but more on Bharat Electronics (BEL) or these kind of stocks or maybe more on the Bharat Forge. But I think that L&T seem to be having huge potential and probably that is driving the stock to move up.
I do not find any reason for the core sector or the core business of the company really to grow whether in the infrastructure or maybe in other verticals. But this defence seems to be very promising and the kind of talks which are going on, the kind of order inflow which we will be seeing and the kind of tie-ups, India will not be surprised that maybe five years down the line India becomes a net exporter also for the defence equipment's and all that. So probably that is driving the story as positive for L&T.
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