Here's why Tulsian is upbeat on RBL Bank IPO

SP Tulsian of sptulsian.com shared his views on which cement stocks to look at and the rationale behind his bullishness on RBL Bank IPO. Below is the verbatim transcript of SP Tulsian's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18. Sonia: From the cement pack, we saw some decent numbers coming in from India Cements and now everything is working in favour of these companies. On one hand costs are falling, on the other hand price hikes taken in certain parts of the north are aiding companies like Shree Cement, what would be your top favourites even at this point? A: That’s right that cement is seem to be the flavour of the market, but if you really go by the trend or maybe by the valuation, I have set a limit that the stocks which are ruling at enterprise value of USD 60 per tonne that can all get picked up now, because if you take a call on UltraTech or maybe Shree Cement, I don’t think that those are the stocks within the reach of the retail investors number one. Number two, definitely because of the heavy monsoon which we have seen pan India, the offtake is definitely seen lower. We don’t get the cement dispatch figures right now which we earlier used to get on a real time basis, but nowadays it is not seen available even in the media also, so the offtake having talked with the cement manufacturer, the offtake is definitely seen lower even in this 15 days of August and even in the month of July also, which will only get picked up only with the end of September. So maybe, second quarter will be seen as a disappointment and whenever you see the distribution seen happening, these kind of upticks are seen coming in into the stocks. So I won’t be keeping a positive view on the high price and the stocks which are ruling at a valuation of USD 100 per tonne on an EV basis. So this is my call that yes there are many ideas available in that space, but look for a valuation call and look for the companies where more efficiencies is expected to come in, in the form of maybe the earnings before interest, taxes, depreciation, and amortization (EBITDA) margin can get expanded. Suppose if the companies now having an EBITDA margin of 16-17 percent, take the case of India Cements 17 percent, that can get ramped up to a level of maybe 20-22 percent in the two or three quarters, because I don’t think that there is much scope remaining invested into the kind of stocks like Shree Cement or maybe Dalmia Bharat were already the efficiency at its peak and you can’t really improve your efficiency going forward or the profitability can only get ramped up by the increased capacity utilisation, which is unlikely to happen in Q2. So it is a mixed reaction I won’t be too keen to buy the cement stocks, but yes some of the stocks having corrected and now ruling at a valuation of maybe USD 35-55 per tonne on EV basis. There are few ideas available like 5-7 stocks available in that space which can be looked into. Anuj: One of the stock that backed over the last few months is Shalimar Paints and I think its hit your target now if I am now wrong Rs 185 was one of your targets, still good for more or would you recommend profit booking? A: Yesterday afternoon, I have stated that there are two developments, which has really happened and which I am giving lot of credence to one is Chairman Mr Jhunjhunwala having resigned who is also a promoter, let me just give you a background 62 percent promoter stake, 31 percent each held by Jindal and Jhunjhunwala. Jhunjhunwalas are the NRIs based in Singapore, so Chairman Mr Jhunjhunwala has signed, Ratan Jindal won’t be seeking his reappointment in this ensuing annual general meeting. So both the promoters and director are vacating their office as directorship and chairman. While talking to one or two close people those who are close to the management, they have said that probably this could be taken as a precursor for the stake sale and if you all recall about couple of years back, not this last 12 or 18 months. Couple of years back the management have stated that this is not the business fitting into our profile, so we want to exit from the paint industry or maybe the paint stock. So actually if you really see in this last two years, first take a valuation call on the market cap in spite of this rise of 20 percent today, the market cap is Rs 350 crore and if you add debt of Rs 110-120 crore, the EV is less than Rs 500 crore and mind it that this is the oldest paint company and if you talk to some of the industry experts, they say that practically everyone is in the queue whether you talk of Kansai Nerolac or your talk of Berger or you talk of Asian Paints, I don’t know about the Akzo Nobel whether they have also thrown their hat in the ring, but it is said that probably the due diligence is going on or the talks are going on and if the Rs 500 crore is the EV and mind it this company has been posting profits for last three quarters. Prior to that they have all been showing losses, Q1 numbers were not that great, but Q4 numbers were very satisfactory. Again Q2 numbers can expected to be good, so if the stake sale happens if this management rejig, what has happened is taken as a precursor for stake sale, then I won’t be surprised to see the stake sale even happening at a price of Rs 300 per share also, because in fact Rs 180-185 was my target when the stock was ruling at Rs 120-130 and we have been continuously and repeatedly giving a buy call, whenever the stock has corrected to a range of Rs 130-140. If stake sale does not happen, I won’t be surprised to see the stock again slipping back to a level of Rs 165-170, but it has now crossed the support and it is seen now holding a support of Rs 160 and if the stake sales happen I won’t be surprised to see the price moving to Rs 230-240 also, because as I said if the deal likely to happen at Rs 300 per share open offer will trigger where the entire 100 percent acceptance will be there, but again this maybe a wishful thinking. Nothing as we have really seen in this last couple of years, so I don’t know how much one can really speculate on the stake sale story, but yes the things are looking quite cheap on a fundamental basis amongst all the paint stocks. If you see on a relative basis this stock has not performed so much as the performance or the kind of up move which we have seen in the share price of Asian Paints, Berger Paints or maybe Kansai Nerolac or maybe Akzo Nobel. Akzo Nobel is the least performed and there are no other players available in the paint industry.

Anuj: I know you were actually happy that Rajan was not continuing so now if it is between Urjit Patel and Subir Gokarn, what is your reaction? A: If you ask me, probably I would be expecting some new face other than both of them. If you really ask me, the tenure of Subir Gokarn and Urjit Patel because if you see now with the changed scenario, committee having fixed and all that, the role of the Governor will become more of leading the team or maybe the Reserve Bank of India (RBI) and I don’t think that those qualities are existing in both of them. Again, this is a very wild and risky statement to preempt and opine on this matter, suppose if one of them comes in but I will be expecting someone new other than both of them. Anuj: The ratio could be about 1:5 adjusting for Videocon’s ADR and the fact that it is equal to four shares. At this price do you think Dish TV is getting a good deal, would you be a buyer of Dish TV? A: Yesterday I have expressed my view that honestly I don’t find the valuation of it because if you convert it into the EV, it works out to about Rs 8,000 crore and looking to the valuations at which the Videocon D2H is getting prior to couple of days back because of the listing of the NASDAQ and all that, it is working out at about Rs 6,200-6,300 crore. If you really see Dish TV holding 27 percent market share and if they add 16 percent and you are paying 30 percent premium on that, I don’t think that because the equity dilution of 80 percent will also be seen quite negative by the market and Dish TV is not a cash rich company or it is already having the problem on the bottomline, the company has come out with a bottomline. So I don’t know what synergy it will achieve by paying such a hefty premium or maybe in absolute valuation of about Rs 8,000 crore. Sonia: Bharat Financial Inclusion has clearly been one of the stocks of the year and there is no letting up even now. It saw a bit of correction in this month but now once again the buying has come back. At Rs 800 how attractive does the risk reward look? A: If you see, the stock has become a brave hearted trader stock because if you see the momentum, I don’t know the exact high level which the stock has seen, it was somewhere around Rs 870. Then it fell to as low as maybe I think about Rs 720-730 in these 15 days only. So, I don’t think that these things are really giving comfort to the traders but purely on a fundamental basis if you see the fundamentals are looking quite expensive on a price-to-book or maybe on any other when you compare it with other NBFCs. However, the momentum, the kind of grip the trading momentum which we are seeing in the stock is seen quite strong and same thing is in fact happening in Ujjivan also. Having corrected from a level of again Rs 560-570, I don’t know the high and from thereafter it has fell to Rs 430. So, both these stocks are showing extreme volatility and extreme ups and downs within a very short period.

Anuj: I read your note on RBL Bank today and it looks like you are quite positive on the IPO and recommending subscribe both from listing gain and even long term gains point of view? A: That’s right, in fact, just to give you a background if you recall I had given that kind of view on Ujjivan, that kind of view on Advanced Enzymes and if you really see the kind of growth which has been shown by this bank is phenomenal. I think we need to take the background or the context, see the performance of the bank in this last 5 years, since the time Vishwavir Ahuja came in, in the 2011 and the bank has consistently shown a growth of 40-50 percent over all the fronts. If you see the maybe deposits, advances of Rs 21,000 crore, deposit of Rs 26,000 crore and this bank was earlier in 2011 was only in southern Maharashtra and Northern Karnataka and today this bank has presence in 16 states and the kind of growth, if I just quickly tell you Rs 9.30 is the earnings per share (EPS). I won’t be surprised to see the 40 percent growth on the bottom line and in spite of being into the agri, the net non-performing asset (NPA) is sub 60 basis point. I think this could be the lessons for other banks also including many of the PSU bank that how the things can be turned around and what I liked about the bank is that going forward they will be having a mix of 50:50, 50 percent from wholesale and corporate banking because obviously nobody want to leave the secured business and 50 percent will be in the agri, retail and the individual kind of loan and again the best part is that employee stock ownership plan (ESOP), 60 percent of the workforce of 3,700-3,800 people are covered under ESOP and even the current account and savings account (CASA) ratio, which Prakash has touched upon, let me just tell you that the banks having a range of Rs 100,000-200,000 crore, they always have a CASA ratio of 20 percent. If you want to have a CASA ratio of 35 percent, you need to have a range of Rs 300,000-400,000 crore and the presence in 23-24 states, so the CASA ratio growth of 44 percent having shown by the bank in FY16 is phenomenal. So yes continuing the same trend is seen feasible and achievable of a 40 percent growth in the time to come for next 3 years. So if I take that background Rs 14 EPS for FY17 that is current year and about Rs 20 EPS for FY18 is not looking difficult and on those parameters, in fact, I think that that this stock is likely to give huge gain those who take a little longer term view, maybe of about 6 months what we have seen in case of Ujjivan and Advanced Enzymes. So I am very positive even from a listing gain and  the price band Rs 224-225  in fact was contemplated by the management even one year back or maybe 8 months back, when we have been taking a call on the stock and that band has not got revised upward. Tis is a classic case of a small finance bank also, those who venture into the agri loan maybe couple of years back which is seen as a negative for as a social obligation and all that and they have proved profitable and they have proved their performance, so overall keeping a highly positive view on this IPO and I expect that the people will really get rewarded even if they keep a time horizon of 6-12 months on the stock.