In an interview to CNBC-TV18's Anuj Singhal and Sonia Shenoy, SP Tulsian of sptulsian.com spoke about his readings and outlook on the fundamentals of the market and specific stocks.
Below is the verbatim transcript of the interview.
Anuj: I first want to discuss oil marketing companies because we have seen crude prices actually go up and at the same time, today these stocks have also done well. Do you think these stocks are now just correcting some of the underperformance of last one month or two months or is there anything more to it?
A: Maybe combination of 2-3 factors. Firstly, if you really see the underperformance for last one month or maybe I would say that last 45 days, actually all the oil marketing companies have not performed and we have seen a good consolidation. In fact, weak hands, weak traders have exited and even the impulsive investors, those who have been entering for a very short duration of a week or a couple of weeks, they have exited.
Now if you go by the trend, I do not think that rising crude prices, people are sometimes saying that the inventory gain, but I do not think that those are really material things of rising crude prices is seen as a positive for oil marketing company. That is just a coincidence, but apart from that, the announcements again came that probably companies are looking to fix the prices on a daily basis. That will take away, maybe the inventory gain or the margin contraction or maybe the margin expansion because of the fortnightly on every 1st and 16th they have been setting up these prices. So, that are seen positive that that will remove the volatility which otherwise was seen in this maybe this fortnight period. So, that is seen positive.
And apart from that, as I said that the stock have well consolidated in the last 45 days and now have been witnessing renewed buying. And actually, I am expecting, in fact, I have been keeping positive stance in the oil marketing company for the last couple of weeks in the afternoon show. I have stated many times, but I think that now, more specially the Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) are seen to rise further from here on in this series itself.
Anuj: Your thoughts on both these stocks, Avenue Supermarts (D-Mart) and Shankara Building Products, now at current prices.
A: Two things. Both are in fact from the retail space. If you are taking a call, definitely the momentum is seen in these because first if I take a call on D-Mart, with the market savvy promoter, who is holding 82 percent, you will not see the price erosion happening in the stock price because of the low float. So, you do not have the risk that the prices will slide like 15-20 percent in the next couple of months or so. Definitely growth is there.
But apart from that, one should really draw the comparable peer that which is the comparable peer available. And if you see the trading pattern of Future Retail, in fact on the day of listing and maybe 3-4 days thereafter of D-Mart, Future Retail has corrected maybe by about a couple of percentage. But in this last one week, the share has risen quite a lot. I am referring of the Future Retail. So definitely D-Mart is seen maybe fully priced at expensive. Now, only the trading play or only the low float is playing into the share prices to move up and not the fundamental reason because even if you factor in the growth of about 25 percent for the next three years on topline and maybe 30 percent on bottomline, probably everything is seen priced in. in fact I have been keeping my extremely positive stance. In fact, when they went public, I said that this is an extremely excellent issue.
Coming specifically on Shankara, what I like about Shankara is that continuous fall in their raw material cost which is increasing their profit after tax (PAT) margin. And second thing that they only have two percent of their total administrative costs or the total selling expenses, everything which includes the lease rental also. So, maybe going forward, they may not be able to ramp up the turnover which is closer to about Rs 2,300 crore on an annualised basis. I am referring for Shankara. But there will only be margin expansion. But even margin expansion has to get stopped at some place, the raw material prices which have been brought down from 90 percent to about 86 percent for FY16. I do not think that further room is there.
So Shankara I will not be advising entering into that in this price and I will not be surprised to see the share correcting also maybe by about 15-20 percent because you have the competitive play available in the similar space. And if you see the kind of turnover also which Shankara derives is more from the steel items, maybe like the steel items which are used in the housing sector maybe for furnishing your house or decorating and all that plus cement and all that which are all low margin business. So, if it is difficult to expand your topline, I do not think you can really justify these kind of valuations from Shankara also from here on.
Sonia: I wanted your view on what one should be buying now because we have not really got a major correction. If this turns out to be say a 5-10 percent correction, what would you look to buy on the dip?
A: In fact, there are a lot many ideas on the sector-wise, if I just say that maybe probably auto ancillaries, cement and sugar. But if I need to go specifically on a theme on which I am banking on a very big way is on the steel sector, the stressed asset sale. If you see, yesterday, we have covered the banking RBI policy meet and all that where the RBI also have said that they will be taking up the stressed loan matters maybe from the middle of April and that we will see start happening in one week or so and whatever information which we have been gathering that there are seen many of the prospective buyer for this stressed loan in the steel sector and I think that can really be a very big area to play with.
Because in fact, I have earlier also stated for example that two stocks, one of Monnet Ispat and second is of Bhushan Steel because if you see the stressed loan in case of Bhushan Steel, it is about Rs 45,000 crore. Similar is the case with Essar Steel, Rs 45,000 crore. But Essar Steel is not a listed stock.
But if you take a call on Bhushan Steel, if you take the present value of the assets and the low equity of Rs 45 crore, just Rs 45 crore on a debt of about Rs 45,000 crore, I think there will be a good amount of haircut which will be given by the government as well as by the RBI. And once the hands gets changed for these steel stressed loans, they can really be a big multiplier for the existing stocks which are ruling at a very abysmally low levels and all that.
Sonia: We now not only have an appreciating rupee but we also have pricing pressure in the IT space. So put together, looks like it is going to be a bad cocktail for them. Is this is a space that you would completely stay away from?
A: Definitely strong rupee is definitely seen negative for IT stocks. But that is not the only reason. In fact, we have been saying for the last one year that avoid the IT stocks because if you see the kind of over-ownership by the institutional investors, in fact they are finding it difficult to exit maybe because of the compulsion or maybe because of the quantity which they are owning.
So, I do not think there is any reason and that too in the scenario when the rupee is going to get strengthened maybe in the coming times also. Maybe I will not be surprised to see it moving to a level of about Rs 63-63.5. So, definitely that will be seen negative for all the IT stocks. And then you have the comparable opportunities available in various other sectors, there is no compulsion for any non-institutional investors who remain invested in the IT stocks.
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