In an interview to Latha Venkatesh, Sonia Shenoy, and Anuj Singhal, SP Tulsian of sptulsian.com shared his views on the fundamentals of the market and the outlook going forward. He also spoke about specific stocks and sectors.
Below is the verbatim transcript of the interview.
Latha: Tyre stocks have been very much on the radar. There is an expected meeting for discussing anti-dumping duties. Rubber prices are also favouring these stocks. What is your sense, is there anything that you like in this space?
A: No, not at this stage because the kind of run up which we have seen in the share price practically of all the tyre stocks and in anticipation of the anti-dumping duty seen coming in. However, you have a different view maybe of the user from user point of view and maybe from the industry point of view.
If you go by the industry point of view, looking to the soft rubber prices, the kind of comparative or the import parity prices vis-à-vis the domestic prices of the Chinese tyre and the domestic tyres, not much differential is seen and the record performance having shown by all these tyre companies, I don’t think that they have a case for this one.
If you take the situation of minimum import price (MIP) having imposed for the steel sector, huge exposure of the bank is there. We all know that about maybe Rs 2.5-3 lakh crore is the exposure to the steel sector and the kind of losses which they have all been incurring. However, that scenario no way you can apply the same logic here to build your case for imposing an anti-dumping duty. If you go by the international precedents also, there have been no such instances.
So, I think that the run up has seen huge having taken place in all these stocks largely because of the higher expectation or maybe because of the trading momentum. So, I throw caution that probably they are all ruling at a higher end of the range of all the tyre stocks and profit booking can be made in all of them.
Anuj: The other space which has been remarkable in its strength, is NBFCs. Edelweiss yesterday hit a new high, we have Manappuram which has surged 50 percent this year. You were positive on some of these stocks, Bharat Financial has been a big gainer, but any of the stocks where you still have good risk reward in this space?
A: We have been keeping our positive stance on all NBFCs maybe for last 18 months or so. In fact, we have gone overboard during demonetisation maybe when the stocks have all corrected by about 30 percent. If you take the situation going forward, still I see a lot of steam existing in this space. So, maybe if two or three stocks, if you really want to though, one can always take a general call on all the stocks as a positive bias.
However, I will be choosy and selective in going with two or three NBFCs. One being Bajaj Finance because we all know that this is the leader of the market industry having hit an all-time high and the kind of momentum which we are seeing intact. So, that is one stock which we like.
Second is Ujjivan Financial among the micro-finance space purely on the valuation basis and all that and third is Cholamandalam. If you see Cholamandalam Investments, in fact Shriram Transport and Cholamandalam, both were seen laggard maybe in this last couple of months, but Shriram Transport had really caught on. It has moved up by about Rs 150 in this last one month or 45 days.
However, Cholamandalam if you really take a call, I don’t think that you have any kind of discomfort at the current level at which the stock is ruling at sub Rs 1,000 with earnings per share (EPS) expected for FY18 closer to about Rs 48-50. So, these are three stocks on which we will be keeping a positive stance even at the current level, i.e. Bajaj Finance, Ujjivan, and Cholamandalam Investments.
Latha: What is your sense, now that the government has tackled most of the macro problems like taxes, Aadhaar, direct benefit transfer (DBT), they seem to have put all their energies now on NPA resolution. Do you think this is a gamble that will pay, would you buy any PSU stocks?
A: In fact I think this is the right move having taken by the government and I don’t think that this is a gamble, this seems to be a calculated move on part of the government. Let me explain, take the case of two steel accounts, one is Bhushan Steel and second is Essar Steel. Both are having exposure or stressed debt of about Rs 50,000 crore; anywhere between Rs 45,000 crore to Rs 50,000 crore.
What used happen prior to February is that all these lenders used to call the borrowers and ask that give us some money, convert some part of your loan into equity, and all those things and where they were offering the couple of thousands crore that okay we will give you Rs 2,000 crore for conversion and all that.
However, what we have gathered from the information, take the case of JSW Steel, they have initiated a resolution to raise the long-term debt of about Rs 5,000 crore. If I just connect this that Monnet Ispat is seen to be on the platter to be given to JSW Steel, they have an exposure of about Rs 10,000 crore.
Probably the haircut which will be offered or which has been asked by JSW promoter is seen to be about 60-65 percent. However, if you come via media, it will be given maybe a haircut of about 40-45 percent or 50 percent which bankers will all be willingly prepared to give it. If you connect that, company intends to raise Rs 5,000 crore and you have an acquisition of Rs 5,000 crore.
So, coming on the point of Bhushan Steel and Essar Steel, now if you see the developments which has been happening from the informed circle that Essar will now come on table to offer a hefty amount to retain Essar Steel. Otherwise, what has been happening by government is, that they are contacting the prospective buyers, those who have similar kind of capability, and what I have gathered that ArcelorMittal and Vedanta, two seem to be the prospective buyer for Bhushan Steel and for Essar Steel.
So, if Essar Steel, the existing promoters who are capable to have the rearrangement, it is not that banks are not prepared to give haircut to the existing promoters, but they want concrete rearrangements to be taken place with the existing lenders, with existing borrowers where they want a hefty sum on the table as well as apart from the re-schedulement. So, yes, I think that this is a very good calculated move and I am hopeful.
If you have heard finance minister, he has said that we need to tackle only 30-40, in fact 50 was the outer limit. So, if the two accounts, like Bhushan and Essar which are just as an example, if Rs 1 lakh crore of stressed loan can get tackled with, I think this is very easy and there are maybe four or five steel sectors alone where the exposure is anywhere between Rs 5,000-10,000 crore. So, this is the story for each sector and I think that once the guidelines are out, banks will be quickly moving ahead. Then there won’t be any kind of subjectivity.
Once the rules are out, the re-schedulement and the induction of a new buyer can easily be find out and with the improvement in the sentiments, I think people have started looking for these acquisitions, those who are not willing to make any kind of further investments in the private sector. So, I am keeping quite positive hopes and view on this move of stressed loan assets resolution.
Sonia: I wanted to come to you on the power space because today there is a mega power policy announcement expected at the cabinet meet. This is a space you track closely, any favourites here?
A: We need to look for the power generation or maybe the increase in plant load factor (PLF) of the power generation companies because if you see, still there has been poor off take.
However, actually which I have been continuously maintaining with the huge capex having made in the T&D space and approaching summer season and one is the returning back of BJP in UP. Now, we all know that about 16 percent of the population is in UP and there is a huge demand. 20 crore people are in UP, the population of UP is 20 crore, and there is a huge power demand and this government will not be left behind in providing power to all of them though it will take time.
So, maybe the policy announcement can be -- one has to really wait to see the broad contours, but yes the power generation, PLF of the power generation companies has to get increased because now there is no shortage of any feed stocks, whether you talk of coal, or whether it is for the thermal, or whether it is for the gas based power projects. Even the PPAs are all getting signed by.
So, yes, the discoms once becomes again back on track with buying of the power -- I am keeping a positive stance. Taking that into consideration. Power Finance Corporation (PFC), Rural Electrification Corporation (REC), definitely falls in that category but one stock which we have been recommending maybe for last one month is PTC India because that seems to be the beneficiary. They are the power traders or they are power exchange and they will be seen huge beneficiary coming out of this.
Latha: You spoke about PTC, among the power generators do you think Tata Power is a good idea at all?
A: No, we don’t like Tata Power because of the issues involved. If you see their Mundra ultra mega power project, that is still seen struggling. However, amongst that space, probably we like JSW Energy because that stock looks quite good amongst the capacity additions.
Other power generation companies are seen more on an integrated play, but maybe on a standalone basis if you really want, then CESC can be looked into because it has embedded the retail Spencer’s valuation also seen in it.
Latha: Larsen and Toubro (L&T)?
A: Yesterday only they got the order of Rs 2,400 crore for Worli BDD Chawl, about 16 acres development.
Latha: This is a transmission and distribution business order.
A: This is from the electrical segment, but I am talking from the construction or maybe the real estate. Yesterday they bagged an order of Rs 2,300 crore Worli BDD Chawl of 16 acre development which probably in my view will last over four years.
If you now see many of the developers, those who are at the high end in Mumbai, they have all been going with L&T. So, maybe apart from L&T, development of this cluster of 16 acre at Worli BDD Chawl will really transform the central Mumbai as well.