In an interview to CNBC-TV18, Prakash Diwan of prakashdiwan.in shared his readings and outlook on specific stocks and sector.
In an interview to CNBC-TV18, Prakash Diwan of prakashdiwan.in shared his readings and outlook on specific stocks and sector.
Below is the verbatim transcript of Prakash Diwan’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy.
Anuj: The stock that everyone wants to know what to do now is Infosys. Two months back the market leader, lifetime high and now at 52 week low while the market is close to 52 week high.
A: It has become the proxy for the bad news flow that we are seeing particularly related to the Brexit. So, while it was actually ironically Tech Mahindra that warned us of tough times ahead and it was Infosys that took the brunt. My sense is that it probably has always been the first in terms of getting into new territory, so the impact also would be felt accordingly in that order.
However, it is difficult to write it off just because of the one-off kind of a thing. While it is a trend there could be headwind which are stressful, I would still wait for the commentary in terms of how they would want to react to this particular situation whether there are some other geographies and product lines which could start raving up for them.
However, as you keep on saying everything is good at a price and Infosys closer to Rs 1,000; I don’t think is something that you can easily ignore. So, you would look at buying into it, nibbling into it if not really huge chunks.
Sonia: We have two largecaps that are going to come out with their numbers this week that you track closely one of them is Tata Motors and the other one is Aurobindo Pharma today. Are you bullish on either ahead of their numbers?
A: Auro Pharma very clearly has had a good run especially the US market, expected to really contribute significantly about 25-30 percent growth. However, unlike some of the other larger players it has not had those issues of pricing power or some weakness in any launches. My sense is Aurobindo is definitely a very strong bet to play the US market again. The numbers would definitely not disappoint is my expectation, but I wouldn’t really care so much in term of the long-term orientation being intact as buy.
On Tata Motors, it’s doing things which are very gradual, which are very quiet and the kind of response we are getting now come to Tata Motors in terms of all its product lines except for the Chinese segment is extremely positive. So, my sense is Tata Motors will still see a huge wave of rerating or I would call it reacceptance as a stock to have on the auto exposure, which is not the case as yet. People are still very mixed about between Mahindra and Mahindra (M&M) and Tata Motors and Ashok Leyland. It doesn’t standout that distinctly but that will start happening after these numbers.
The numbers will tell you that it is a trend; it is not a one-off that you saw last quarter in terms of the improvement. So, hopefully that will reaffirm the stocks rerating potential. However, watch out for improvements that are coming in from the Indian market as well not just global. Because it is a small piece in comparison to the global thing, but it would still kind of be very positive move given the response that it has seen on the passenger cars.
Latha: There were some of those smokestack stocks that came with numbers overnight or rather yesterday. NTPC numbers looked good but do you really go for these stocks anymore?
A: The public sector undertaking (PSUs), it is extremely difficult to time them right in terms of the government's announcement on any dilution or any potential change in policy. NTPC has benefited so much, in fact it is a proxy to the key benefit that quality coal has had. Sometime back, if you recall, we were talking about Hindalco Industries having benefited from the quality of coal that is now available from Coal India. The usage of specialty coal which NTPC had has come down so dramatically, it brings down the costs without even kind of anticipating any other changes. This is not just a one-off; it would continuously have a very different parameter in the equation.
Latha: So, margins can improve?
A: Margins would continuously improve the only issue with the NTPC is that the adventurous diversion into solar and all of this, you can’t real price that in; how much capex it would take away, what kind of return on equities (RoEs) it would get. However, right now the matrix looks very positive, but out of the numbers that came through if you see Hindustan Petroleum Corporation (HPCL) is the one that I would believe will be the most interesting stock today and hereon because, there is so much of confusion whether everything is priced in, is this the peak and then there is bonus too add to the confusion.
However, my sense is some of these stocks particularly HPCL which has very little coming from refining would start showing some sort of consolidation and losing ground because everything is priced in unlike an Indraprastha Gas (IGL) where you see the margin improvement and that was the interesting set of numbers. The margin improvement is again something that will stay. This odd and even thing in Delhi apparently I am told as increased the usage of CNG so dramatically by even the private passenger cars and all and all these new cabs that are coming in, the addition of cars is compulsorily CNG. So, there is a shift from petrol to CNG which is dramatic.
They have got pricing power back, so I think those are things you would look at an IGL and Mahanagar Gas, of course the dividend announcement was fabulous. There is a maha dividend that you heard. There are interesting pockets that are emerging, so I won’t be so hecked up upon the NTPC buy though it has decent numbers, no denying that.
Anuj: Just a thought on Biocon, that stock moved in late trade yesterday and has been a big mover, your thoughts on that stock?
A: With every new move Biocon starts getting slightly expensive and difficult on the risk reward equation, but that is the case ever since it has started moving from Rs 470. What is going to change for Biocon is it is in a different regime as compared to rest of the pharmaceutical players. So, there is a premium that it has started attracting and not many players there. It is riding on potential approvals that it would get for biosimilar which is going to big and insulin is the main stay focus for it. So, after Japan, Europe and US markets are very soon likely to announce that as well for them.
I would believe it is definitely a buy on any dips but if somebody wants to play that thing slightly on a safer bet, it would probably be Syngene International that you could kind of look at because that is going to be a proxy to Biocon success at some stage with a lag. So, it is like between Sun Pharmaceutical and Sun Pharma Advanced Research Company (SPARC) you always had that equation working for quite some time Syngene definitely offers much more value.
Latha: The Allcargo Logistics numbers didn’t look very good. Logistic stocks have run up a goodish bit and now we are seeing selling even in the likes of VRL Logistics after all the seesaw. Allcargo, if you have taken a look, and any of the logistics stocks?
A: I agree. Look at Gati which is the posterboy of this segment. The kind of Rs 125 crore quarterly topline, you are giving away Rs 60 plus price to equity (PE). You will never make money at this rate even if the company were to kind of double its profits and all that. The profit is miniscule Rs 5 crore for the last quarter and even Allcargo has seen a disappointment, there has been degrowth in topline and bottomline. There is too much of anticipation riding on these. So, people have started accumulating but when the selloff comes and if there is a chance of the goods and services tax (GST) getting delayed to next year September from April, which seems like a possibility if not a reality yet, I don’t know what will happen to the earning per share (EPS) downgrades that will come through. So, for quite a few of these stocks and some like Chartered Logistics, which are actively reducing debt, trying to streamline, get a fleet mix which is much more amenable to the GST launch is fine but these companies haven’t done anything different in the last six months, so I would stay away from it.
I would be quite bullish on the liquid handling companies like Kesar Terminals & Infrastructure Limited (KTIL) and the Aegis Logistics of the world because the kind of chemical play that is happening. There is so much of positivity around chemical business in any segment and that is going to payoff for most of these players who are into liquid cargo, liquid handling.
A: Castrol was an expiry impact. The whole month we had overhang of block deal coming through and there were prices of Rs 375 and 380 which were floating around, so that spooked the market a bit and that is where you had a lot of these shorts. Castrol and for that matter Gulf Oil, if you see, as a category are getting rerated; they are no more petroleum related companies they are consumption themes. If we are bullish on two-wheelers, if we bullish on four-wheelers there is a replacement market that you are talking about. Why won’t these companies which are so branded, in fact Castrol is a super brand in itself and to create that kind of a space for itself nobody else is going to come and challenge it for years together.
So, I think very clearly Castrol has to have a rerating, I am very positive on this stock. I would be surprised if it is anything less than Rs 600 by the year end itself. So, it can give you that kind of a move if Hero MotoCorp and TVS Motor Company and Bajaj Auto and all have to fly Castrol has to, this is the lubricant that will make them fly. So, there is no way you can deny that.
Sonia: I also want to ask you about Escorts because yesterday the management told us that apart from tractors it is the railway business that they are focusing on. What are your thoughts on how to approach this stock?
A: Great sounding stuff but this is all long-term; this is not going to takeoff till at least 2020 in terms of real, in terms to compete with the tractor business. Rs 200 crore is just a miniscule. It is a good start. Railways take a lot of time to be able to bid for most of their projects. So, you keep on supplying to them for three years before you become eligible and then you start participating in the tenders.
Escorts' Nanda is alluding to segments which are definitely good on margins; they are the high quality, high technology stuff is not just basic stuff that would not fetch you good margins but that will take time for the railways to itself be in that position. If he looks at the metro segment yes that is faster in terms of implementation and more money to be spend. So, positive, yes, but I don’t expect the stock to get re-rated on the back of this immediately.
Anuj: Let us discuss Welspun India; 20 percent down yesterday and looks like another 20 percent circuit. Is this enough to derate the stock, this Target order because the other export order is also at risk if Target decides to terminate the order?
A: Absolutely and look at the way the management interpreted the crisis. They said we will get an auditor to check what went wrong. It really kind of starts raising a lot of questions saying whether the management doesn’t even know what supply it has been sending to one of the largest clients. So, this entire category, if you see, Target is just a 10 percent contributor to Welspun’s business but this category is closed to about 28 percent overall for its business – pillows and mattress and bed sheets and all. So, that itself would be at risk. If others also start auditing or figuring out that this is not up to the standard.
So, specification and deviation are treated very badly in this business. You can’t go wrong on this and that is a lesson for the Indo Count Industries and the rest of the players as well, so they need to be careful. I think people would start realising; of course right now the assumption is Welspun’s loss is Indco Count's gain, so there is a very simplistic argument, but all these companies are vulnerable to any quality control issues and that is what you need to price in it in to the premiums that we pay for some of them.
Welspun will probably have a tough for some more days to go till this clarity and that the matter is put to rest. So, I think another two circuits you could probably be happy to see it get over just in two if it is not beyond that.
Latha: I also wanted to ask your views on J Kumar Infraprojects. The fears of that metro cancellation had taken that stock down. However over the last few days we are seeing we are seeing a vertical recovery in that stock. Would you touch it?
A: Not really, I will tell you and the reason is not that there is something wrong with the kind of order flow or news flow that this company is surrounded, but the opportunities that are available, if I were to stick my neck out in the engineering, procurement, and construction (EPC) or the construction space there are much more clear visible businesses that are there. The metro is always mired with a lot of issues related to clearances, public acceptance, budgetary and financial closures.
In this space if you ask me Dilip Buildcon is a wonderful company. It has not yet got history but this will what will happen to some quality stocks which get listed, get forgotten and then after a while suddenly you see the moves coming in very strongly. So, Mahanagar Gas, people have just written it off, after the listing and nobody remembered it. Suddenly it has got back into the news and quietly moved up 16-17 percent in just about two weeks.
Dilip Buildcon the kind of order flow that we are seeing is just going to put it into a very different zone. We will wait for a couple of quarters and the numbers and you will see it probably in the top three. Look at what IRB Infrastructure Developers has done in terms of after the results. The results were not anything to write home about but it talked about visibility of earnings going forward and that is what people like and not the historic numbers.
IRB has done about 10 percent-11 percent after the results. So, that space is definitely -- Nitin Gadkari’s blessings are evident on that and he is very emphatic to the whole business saying the interest cost can’t be so high and while we are kind of factoring that in into our annuity rates and all of that so I am happy with the road sectors rather than other things yet.
Sonia: Do you track a company called Healthcare Global Enterprises by any chance. It specialises in cancer care and Reliance Mutual Fund has bought some stake in it. Is this worth looking at?
A: It is a niche, but what is happening after the Fortis Healthcare restructuring is, this entire space is getting kind of a relook. I am sure people will kind of start discerning value given the kind of assumptions that Fortis has brought into its demerger and the restructuring.
Healthcare Global, yes, again it is an IPO which didn’t get celebrated too much post the listing. It has value because it is a niche. However, to be honest I am not a mutual fund that can wait for three or four years and we are not bothered about the growth. So, I would look at investing slightly differently.
If I had to stick my neck out in this sector it is Max India and a disclosure I personally have exposure to it. It is one of the best franchises that you would have in terms of efficiently run business and reminder that Rs 800 crore on non-compete fees that the promoters get is most likely to get funnelled into this business and through acquisitions.
Latha: Refining companies, any thoughts?
A: Hindustan Petroleum Corporation (HPCL) does not have too much skin in that game. It is still largely a marketing company. If refining were to improve margins, improve things assuming all that happens the way it has happened this quarter yes, however, right now everything is priced into this stock fully. I don’t think this stock has more room to grow from here. It will probably lose about Rs 100-150 very easily.
Sonia: You also track Shriram EPC, some of these EPC companies? They won a big order?
A: Shriram has been kind of ramping up. They raised a lot of capital as well and that is why it has been a huge dilution potentially that takes it off the table. However, look at EPC Industries - that is the turnaround in that space and if you are so charged about Jain Irrigation Systems more because it is in the future & options (F&O) segment that it makes a lot of news, but EPC Industries which is now of course a Mahindra group company has done the quite turnaround bit last quarter and growing from here it could dramatically get re-rated for the right reason. However, the reason why this is getting rerated is the government spending directly in this. It is no more subsidies through state governments and all that. So, today these guys are actually paid much faster as compared to the kind of huge lock in they had earlier. When you had to get it routed through different agencies in the state and that never happened for at least 270 days plus. So, that is going to change the whole profile. I think they will become much linear in terms of growth. So, look at EPC this is going to be a scorcher going forward.
Anuj: The other stock that I want to discuss with you is Adani Ports and Special Economic Zone. It has been the stock of the month, up 16 percent that ever since we broke the story on this Related Party Transaction, Varinder Bansal broke the story and the stock has seen a rerating, you see more for it?
A: What is now changing is for Adani Ports is the focus is on operations. Once they get into the expansion of their second and third berths also the jetties that they have they will get into transhipment and that is a big game changer. Just to explain, transhipment basically when you get two ships to dock together and move cargo from one to the other rather than just loading one at a time.
Dubai which is a big centre and since they have a very good tie up with the Ras Al Khaimah, the business could float from there to the Indian shores which is more cost effective especially the one that goes into eastern markets, the Asian markets. So, essentially that is a high value business and they basically have a very good tie up with the third and fourth round of expansion also. I mean they own 50 percent of the new jetty that they put in so. So, all that revenues which comes, 50 percent is going to come whereas the first two licensed so there is a slightly different rate that they get.
However, the expansion has finally happening. By next year middle of Calendar 2017 Adani will be fully operational with all its expansion plans, the Brownfield expansion that they are doing and that is going to be the re-rating for the stock. It has moved from Rs 380 to almost Rs 180, so it is just on its way back to recovering its lost ground actually. It is a great buy but for the long-term. Most of the good thing in the short-term is kind of been done but you will still keep on seeing it inch once in a while and make some news.
Get Lok Sabha 2019 Live Election Results, constituency-wise tally, news, views and analysis
Follow our Lok Sabha Election Result Live Blog here.