Here is why SP Tulsian is bullish on Hindustan Zinc

In an interview with CNBC-TV18, SP Tulsian of sptulsian.com, talks about why he is bullish on Hindustan Zinc and other non-ferrous metal stocks. He also gives his views on the non-banking financial companies (NBFC) and Adani Ports.Below is the verbatim transcript of SP Tulsian's interview to Prashant Nair and Reema Tendulkar on CNBC-TV18. Reema: The biggest gainers in this year have been the metal stocks, so Hindalco has rallied 90 percent, Tata Steel has seen a rally of close to about 50 percent in 2016 considering we are entering a period of dollar strength would you recommend people to shift out of commodities India portfolio, what will be the call that you will make for the next few months? A: If you want to take a call the dollar strengthening will really be a quite positive for the non-ferrous metal stocks, because if you take a call on aluminium, copper, lead, zinc all are the dollar denominated or I would say that the import parity prices – you discover the prices of all these metals on the import parity prices. Now the biggest beneficiary in that space will be Hindustan Zinc who have their own from raw that is from ore to finished product like zinc and lead both – so they will be seen the highest beneficiary. Now if you see the situation I don’t think that one can really take a general call. Now if I come on the natural resources which are largely used in the ferrous industry like maybe the iron ore, ferrochrome, ferroalloys and this type of material they have really seen a good jump in the commodity prices by more than 100 percent. To give an example of the iron ore the prices have risen from USD 40 per tonne to USD 80 per tonne, same thing is happening with ferroalloys and ferrochrome also and the Sarda Energy which I have been seeing on the screen that this is a buzzing stock having moved by 6 percent in this last maybe couple of hours is a case in point – so I would say that avoid taking a general call on the commodity or maybe the metal space. You need to be very specific bifurcate them on the company wise. I won’t be taking – what you call positive call on the Hindalco merely on the pretext that they are into the non-ferrous, because for the aluminium they are the integrated producer from bauxite to aluminium is being made, but that is not the case with copper, because copper only they are getting the treatment and refining charges (TC/RC) and they are not the integrated producers like Hindustan Copper and if you see the debt situation prevailing in the books of the company though the stock has risen as you had said by about 150 percent, but I won’t be taking a bullish call. Yes, the import parity prices where the prices are discovered like Hindustan Zinc looks a good space and I have been keeping a positive stance on the natural resources stocks like iron ore, ferrochrome, ferroalloys where 4-5 stocks exist in that space like Sarda Energy, Manganese Ore, NMDC, Sandur Manganese, Indian Metals & Ferro Alloys these are the stocks which are seen to be quite beneficiary, because they have their own captive mines and they are making the end products and those end products are exported to the China and all that where the good realisation is seen and the weak rupee is also helping them with no effect of demonetisation seen, because the demand is robust from China by the steel sector that is the ferrous steel sector as well. Reema: The selling pressure in the Non-Banking Financial Company (NBFCs) continues, it is a relentless pressure that we can see. Bharat Financial has lost more than about 12-13 percent so far this week. Today Manappuram General Finance, Muthoot Finance, Bajaj Finance that entire bunch of stocks are quite weak in trade. Any stock that you would recommend to go long because the sell off has been discounted now, the weakness has been discounted? A: If you are asking for taking a position in F&O because since you have used that word that any stock you suggest to go long, I will not advice anyone to go long in the F&O series at least till this expiry because now we are only left with five days of expiry and generally there is no respite to be seen and taken. Now if you take a fundamental view probably I will say that all the NBFCs are qualifying as a good buy because the kind of extreme view which sometimes I would say or many times I have seen market taking that extreme view that it reminds me of the February 2016 also where the extreme pessimism was moving in the auto-ancillaries, NBFCs sugar stocks, chemical stocks, those who have given a gain of maybe 100-500 percent in 2016 itself. In fact I beg to differ that midcap has not given good returns in 2016. In my whole career of 40 years I have not seen the kind of performance I have seen in 2016. So, coming specifically on NBFCs all are looking good. It is very but it is premature to take a call that where they seen to have bottomed out. Whether today or tomorrow or day after because the kind of pessimism as I said as if the Q3 is taken as a washout Q4 will be worse than that which is again an extreme negative view being taken by the market. Prashant: I just wanted to get your quick thoughts on oil marketing companies (OMC). So far, even though it has been, this time it was delayed by one day, the price increase came to compensate for losses that would have arises because of the rise in oil prices. Would you keep the fait there or at some point do you think that that willingness to increase even as oil crosses USD 57-60 per barrel, that will run out, what is your sense? A: I have been keeping a positive view on OMCs for the simple reason that I have not seen such a seamless transfer of the price hike. Now, if you the extremes that what will happen when crude crosses USD 60, when the crude crosses USD 65, when crude crosses USD 70. Take hypothetically, if we are taking an extreme view, then I will not be surprised to see government also reducing or rolling back the excise duty which they have done. In fact, if you see the major reduction of the crude has been largely enjoyed by the government and not by the customers. In fact, I put a ratio, it is about 20 percent to 80 percent. 20 percent or maybe ballpark 25 percent has been passed on to consumers and 75 percent has been retained by excise duty. So, I do not see any reason why it will not be done when crude in any extreme situation if it crosses USD 60. If we can think of government becoming so bold of transferring Rs 10,000 to one Jan Dhan account and then take a hit of Rs 2.5 lakh crore, they can very well, in all sanity, take a hit of Rs 5,000-10,000 crore for remaining part of this financial year. And suppose if perpetually it remains to be at a very high level, then the situation becomes difficult or maybe totally different in that case. So, in this scenario, I am keeping my positive view because for the simple reason that there may be delay of couple of days here and there or maybe the high got staggered by about a fortnight or so to not having passed on fully, but I am keeping the positive view on the OMCs. Prashant: If one were to throw open the floor to you in terms of where do you find maximum conviction, one stock where you find maximum price and valuation comfort, which one would that be at these levels? A: Maybe Century Textiles because if you see the multi-divisional presence, the huge reality, in fact the bigger kicker which I am seeing in the performance of the companies, the turnaround of the paper industry or the paper sector of the company which has started contributing or will start contributing EPS of closer to about 12-15 on an annualised basis partly reflecting in this year also and secondly on the real estate front where the development of five lakh sq ft in the heart of Mumbai that is Central Mumbai, Prabhadevi and Worli has already started. The leasing process has started and the development of the real estate property to the extent of 15 lakh sq ft is underway. Reema: Do you want to decode the news which came out on Sparc Systems, the Complete Response Letter (CRL) that it got for Xelpros from US Food and Drug Administration (FDA)? Does it mean that we are going to get news from the Halol facility and that spells good news for Sun Pharma too? A: If you read this news in isolation, you will probably get mildly enthused, not very high enthusiasm, but yes, you will get mildly enthused. But if you see the track record of Sparc, these kind of developments have happened in the past as well. Plus there are a lot of concerns on the parent, that is Sun Pharma, so I do not think that people are really in a mood to take a risk because the kind of pessimism which has been prevailing on the larger pharmaceutical companies and this being the research arm of Sun Pharma, I do not think that market is giving too many credence. But as I said, if I would have read this news in isolation, probably I would have taken this as a mild positive news. Prashant: Any thoughts on Adani Ports? When one talks about sectors which were immune because of this demonetisation business, Adani Ports, you can argue that demand goes down here, import of electronic items, etc. could go down. Export-import trade could slow down to that degree. But it does not really move the needle for Adani Ports. Is there any other dominating driver which can push this down or this could be a good bet? A: I have been taking a positive call because if you see these port companies and more specially on western India front, the Q2 is always seen dull for these companies because of the monsoons and all that. But there has definitely been a hit on account of this demonetisation because we have been hearing that Chinese orders have been cancelled by the purchasers or importers here in India. But I do not know how much that effect will be seen getting reflected in the Q3 numbers of the company. I am not ruling out the damage will not happen or it will not get seen reflected in the Q3 numbers. But in spite of that, I am keeping a positive stance on Adani Ports.