Here are top trading ideas from Rahul Arora

In an interview to CNBC-TV18's Prashant Nair and Sumaira Abidi, Rahul Arora, CEO at Nirmal Bang Institutional Equities shared his readings and outlook on market and specific stocks.Below is the verbatim transcript of Rahul Arora’s interview to Prashant Nair and Sumaira Abidi on CNBC-TV18.Sumaira: I want to begin by asking you about the pharmaceutical space, what is really happening there, I know last year you had initiated coverage on Dr Reddys, within the universe what are the stocks that are now looking attractive to you?A: I think you have to view it in context to the market and I think the last call that we had on the market has gone so terribly wrong with the 1,000 point rally we have seen from 7,900 that it is actually tough to ascribe value on a market wide basis. So, I think if you are entering the market now, you probably need to have at least a two year horizon because the chances of you going wrong are higher than the chances of you going right especially if your call is on the long side. So, on that backdrop when we try to look at value, there is not too much that is being ascribed across the board. So, pharmaceutical looks like one space where you have had issues with FDA, you have had issues with warning letters where I think the overall inherent structural stories by and large are in place, but there has been a bit of a time and price correction. So, you are right, we did initiate on Dr Reddys and again there was a bit of negative news this morning, but we are advising clients to go ahead and buy the stock on every decline because we think the proprietary pipeline of Dr Reddys is really strong. Our analysts believe you could get a 25-30 percent upside on largecap pharmaceutical name; that is pretty decent. We are also pretty bullish on Cipla and Aurobindo Pharma where again in the case of Cipla, there has been a lot of talk about margins being under pressure because of costs going up. Our big call is that margins will expand because most of the employee costs that have hurt margins from here are probably going to recede and the European part of the business along with the US will ramp up quite substantially. Aurobindo has seen a reasonable amount of price correction, so, I think in all these three names, we have about 25-30 percent upside factoring in the current negatives in the environment and I think it is not a bad place to initiate an investment argument.Prashant: Do you have any thoughts on DLF? A: You take me back a long time back when I actually used to look at this company in 2008-2009. It is a tough call to take because I do understand that the valuations that are being spoken about are alright to cut the debt, but I think the concerns with the sector are far more than just selling of the rental business. So, it may give you a bit of a pop on the news, but I think with the Real Estate Regulatory Authority (RERA) coming into place and the benami act in the pipeline, it is a sector probably that is best avoided. I know it has been in the flavour off late, but we don’t have a formal recommendation on it. It is more a trade than an investment according to me. I think the challenges in the sector are far too many over the next one or two years to take an investment call on these stocks. Sumaira: Are you looking at telecom again now and what from that space if any? A: I think the big call to take here is the retention rate that Reliance Jio will have. I think the most bullish people on the street will probably say that if the retention rates are as high as 60-65 percent, then Reliance heads to about Rs 1,500 from here. However, if the retention rates on the current subscriber base drop down to say 35-40 percent, then the numbers start looking very different because the sensitivity is to the subscriber base at the top end and currently at 10 crore subscribers subscribing about Rs 300-330 in that range in terms of average revenue per user, I think the stock is pretty much fairly valued. However, like I said, if the big delta is going to come in from what the retention rate is going to be and if that number is likely to be 50-60 percent, then you could have a story to play out. In terms of the others, I think they are going to have to play catch up and I think the Vodafone-Idea merger could be a bigger trigger to watch out for in terms of how that combined entity sort of responds. However, you get into a very interesting situation where you have only three players actually controlling the entire sector. So, while it looks like right now everyone is fighting, you may actually be in a situation two years from now where pricing power is actually in their hands when they have the subscribers pretty much when they are holding them by the scuff of their neck because there will be lack of option. So, it could be an interesting space, but I think it will all hinge on the retention rates that Reliance Jio has once March 31 expires. Prashant: You like gold finance companies, I remember speaking with you about Manappuram, Muthoot, etc. you want to add to that? A: I think it is a great place to be. The way you are seeing SKS Microfinance and its high, it was trading at something like 4.5 times price to book, it is obviously seen a bit of correction from there but I think the fact that Muthoot and Manappuram have both sort of de-risked themselves quite substantially from the gold portfolio and reduced the LTV, they are offering products at about three to six months now, you are talking about companies that are probably going to give you return on equities (RoEs) of about 15 percent and 3-4 percent kind of RoAs coming to you at two times price to adjusted book, it is not a bad place to initiate an investment case for both of these. I think if you have one to two year horizon, I think both of these stocks could potentially make you more amount of money than probably buying a frontline bank would at this point in time. So, we are actually advising investors to come in and look at either or of these stocks. I understand from an institutional perspective, you won’t be able to buy both, we are fairly indifferent, but we think both of these could potentially compound 25 percent over the next two years.Sumaira: It is becoming increasingly difficult to find value out there. Any stocks from the broader markets that are looking attractive now, anything that you guys are looking at actively?A: Anything that we would recommend a buy right now would be in and around 15 P/E kind of range because the market is somewhere around that. So, I was hearing Prashant talk about Hero MotoCorp a little while earlier, that is where we have a buy idea. We are pretty positive on the commercial vehicle space, so, we like names like VST Tillers Tractors and Swaraj Engines, CCL Products has been an old favourite of ours, we continue to like that name, V-Guard is another. So, I think there are some very high quality businesses that are coming to you at fairly attractive multiples if you can have a two year view in this market. Bata could be one that has sort of been underperforming for a very long time. It is a high quality name, it was the darling of the market a few years back but it has seen both, time and price correction. So, you never know with retail stocks looking up, Bata could potentially be a dark horse which comes back after about a two to three years underperformance. So, I think these are some of the names which have good RoE profiles, good management pedigree, and could be sound investment arguments on earnings growth.