Here is why SP Tulsian is bullish on paper stocks

In an interview with CNBC-TV18, SP Tulsian, sptulsian.com, recommends some paper stocks, discusses Reliance Defence's deal with Allrig in United States and explains in detail why he has a negative view on Bharat Forge.Below is the verbatim transcript of SP Tulsian's interview to Anuj Singhal and Latha Venkatesh on CNBC-TV18. Anuj: First a thoughts on paper stocks if you like any of the stocks, we have seen a big rally this week? A: One has to identify if just simply want to identify the companies which has a tag of paper, I don’t think that you can really make money. The example is case in point is that of tyre stocks, because people have just been running after the tyre and nobody has identified that Kesoram also have a tyre division. In a similar way if I just give you a stock Century Textiles they will be having a top line of Rs 2,000 crore only from the paper division and that paper division Rs 2,000 crore is equivalent to what turnover is posted by TNPL. TNPL is also posting a top line of closer to Rs 2,400 crore while Century will be posting a top line of Rs 2,400 crore for this FY17 or maybe double of Seshasayee Paper, because Seshasayee Paper has a top line of closer to about Rs 1,000-1,200 crore per year. I am giving you two of the best companies which are having the best operating leverages and all that. If you go by the Century’s first quarter number again only of paper division top line of Rs 500 crore, earnings before income tax (EBIT) of Rs 65 crore, so if I extrapolate the same number I am expecting the turnover of Rs 2,000 from Century only from the paper division and maybe an EBIT of closer to about Rs 290-300 crore and see what is the value now, Century Textiles has paper, Century Textiles has textile, cement and real estate and all are firing, all verticals are doing extremely well. Cement has a capacity of 13-13.5 million tonnes and in fact, when we identified the paper stocks about a couple of month back or maybe 3 months back. Again that was the theme that Century Textiles is looking a screaming buy, but people just want to run I am not saying that all other stocks are not good, but they have all run so much maybe PE multiple of 20 times, take the case of Malu Papers. I don’t think that you can justify the valuation at PE multiple of 20 times with a expected earnings per share (EPS) of sub Rs 2 one can justify the Kuantum Papers which I have given yesterday that expected an EPS of Rs 50 yesterday if you recall in the afternoon show, today also it is 20 percent up one can justify their Rs 50 EPS. Seshasayee Paper again an excellent company, International APPM excellent company. TNPL excellent company, but I don’t think that anyone has really identified this company. In fact, maybe if you combined this 8 or 10 companies put together they will not be able to post the kind of top line which Century Textiles will be posting only of paper division which I am repeating of Rs 2,400 crore for FY17 with EBIT of closer to about Rs 290-300 crore. So under all circumstances if you take TNPL market cap of closer to about Rs 2,500 crore what Century has market cap of around sub Rs 11,000 crore they have textile, they have cement, but since we are discussing the paper theme I just want to draw your attention of this one stock of Century Textiles, which has a capacity of 2 lakh tonne per annum this is a very significant capacity, which they have at the Nainital plant, so I am seeing huge value still existing in case of Century Textiles purely if you take a paper theme, I think alone paper division can give an EPS of closer to about Rs 16-18 to the company for FY17 I am not including textile, I am not including cement and all things in that category. Latha: Speaking of paper it is Ruchira Papers that has ran maximum this month or rather even this week somewhat 35 percent jump. Is there anything in that stock that merits such a big leap? A: Definitely, Ruchira Papers is a good stock, but let me just draw your attention to Kuantum Papers, which we have discussed that has already run about 40-45 percent in this one week, but coming on the Ruchira Papers also as I said that one has to look to the valuations of all these companies with cool mind. It is possible that we may all get trapped at the very expensive level whether you talk of any stocks for that matter and one has to really workout the expected earnings of each company, because paper cycle is really looking quite good because Ballarpur they have 2 or 3 divisions already shut and because of that there is huge demand and maybe the kind of growth which we have been seeing in this packaging and take the case of e-marketing where lot of paper consumption is happening because of the packaging and all that, so things are going to do quite well for the next 6 months as well. So closure of a leading company 3 plants and the huge demand coming in definitely will be keeping the paper stocks in limelight, but I will be very cautious because you cannot give a PE multiple of 20 times to the paper industry which has just shown the sign of revival now, maybe a PE multiple of single digit or maybe if you stretch it in case Seshasayee Papers or maybe stocks like Kuantum Papers one can be comfortable giving a valuation of or a multiple of about 14-15 times. Latha: We just got this Reliance Defence statement saying that they have signed a MOU with a company called Allrig in USA and they have some deals for the MRO market of oil and gas for Southeast Asia region including India that is what the MOU has been signed for. Is this a stock in which you take interest or this kind of deal MRO oil and gas deal? A: If you take the Pipavav Defence the infrastructure they have been the world class, but if you see the kind of assets having created by Nikhil Gandhi, the previous promoter of the company and MRO is a big business because in case of MRO facility you can a very good margin, but in MROs you need huge space and I don’t think that the constraint of the space can really get compromised with the new creations if you want to do it for the defence and all that and once you go into the defence catering, catering to the defence requirement you have lot of security concerns also where the MRO cannot get catered. I am not an expert on these things but when I analyse Pipavav Defence at that time, that was seen as a big bottleneck, so it is very necessary for the company to focus whether you want to go for MRO or you want to go for the new orders, but that kind of announcements which we have been seeing coming in from the company after having been acquired by the new promoters, they are all not going to get fructified for the next couple of years as well. So they are looking more as a statement which will get implemented or which will be seeing the ground reality in the next 2-3 years and even the MRO as I said that you have to look for the things to start happening on the ground as I said that you cannot cater on both the fronts, that is the problem which the company have been facing that they have not been able to keep focus on any one particular thing, so I am taking this statement as a positive, but I won’t be taking a positive call on the stocks because working will not be going to show any kind of improvement for next couple of years. Anuj: Bharat Forge, one of your favourite stocks is up 3 percent today as well, Rs 961. Do you see more highs for this stock? Do you think there is room because even the last months the sales look quite disappointing in the US? Do you think this stock can go higher from here? A: If you keep tracking this monthly sales of the North America truck sales, then probably you will keep taking a negative view on the stock and you will miss the upside which you have already seen by. I do not have the charts in front of me, but I think the stock has already moved by over Rs 100 in this last one month. And when we had this bull and bear scenario case played out on the channel at Rs 650-660, I have said that it is a very good buy and I continue to have the same view because one needs to take the larger commentary of the management which they confirmed that the FY17 target of the truck sales are going to get maintained. So, I will not be too fussy with the monthly sales number even if it slips by a little here and there and since I have said that maybe profit booking can be seen in the near-term though I am not expecting even that to happen in the series, I will not be surprised to see the stock even moving to Rs 1,000. But if you really ask me from a medium-term point of view, from 6-8 months, I will not be surprised to see the share moving closer to its all-time high which closer to about Rs 1,200-1,250. Anuj: If I am not wrong you were bullish on this stock at Rs 22-23. It has moved to new 52 week high today, would you buy it even at current levels? You had told us that this, maybe selling of DNA could be the trigger for the stock going forward, if I get it right, that is something that you had told us? A: We recommended the stock at Rs 18 after Q4 numbers but there is a little confusion or maybe because DNA, the ownership by the company has been acquired to the extent of 100 percent and prior to Q4, in fact we have been taking a positive call on the stock for last six to eight months when we have not seen the good Q4 numbers and the trigger was that if they come out with the DNA, if they exit totally that will be seen a very positive for the company. However, Q4 numbers were so robust that even the print business has shown a very good performance, that means the positive EBIT were seen from the print business and as I said that now DNA is 100 percent owned by the company which they have acquired 100 percent ownership couple of years back from their joint partner. So, yes, that news was there, our call was that if the exit from the print business which was seen a drag but post Q4 numbers the situation has changed. Q1 again the things were not so bad for the print business though there was negative or maybe little negative was seen on the EBIT front and now the company has said that Q2 results dated October 27 and I am expecting that probably again the print business is going to show very good numbers. If you see the kind of focus now the group is setting on, on the media business that is in print and electronics both and all are doing exceedingly well. As I said that about four months back we gave a buy call at Rs 18 and we won’t be surprised to see if the Q2 numbers are coming good from print segments again which are likely to be because of the festive season, good advertisements coming in and all sort of things. I won’t be surprised to see the share moving to Rs 40 by the time we see the results getting announced or maybe post that if the print posts the EBIT in the positive from the print sector. So continue to have positive view in the near term; in the next one month we can expect a rally of about 15 percent from here but I will advice hold for a medium to long-term view as well on the stock.