Prakash Diwan of Altamount Capital Management recommends EPC Industries as it is a leader in the agronomy business.
In CNBC-TV18's hitlist of stocks, experts pick their stocks.
Prakash Diwan of Altamount Capital Management recommends EPC Industries as it is a leader in the agronomy business. Other stocks he has a soft corner for includes Vindhya Telelinks which has an extra resonance in manufacturing capabilities. He has a target price of about over Rs 1100 for the stock.
Ambareesh Baliga gives a thumbs-up for Praj Industries. The government has set aside Rs 10,000 crore for biofuel. If you are looking at EPS, it is 5.8 which is for FY18. At these levels, it is cheap, he said. It won’t be multibagger but it will give decent returns, he added. Sadbhav Engineering is another pick. He sees its order book going up to Rs 6000-7,000 crore.
Dipan Mehta, Member, BSE & NSE is upbeat over Bharat Electronics Limited as it has been a steady performer. With the push given to defence he sees growth rate rising to 15-20 percent. He also recommends Credit Analysis And Research over Crisil as CARE is a focussed purely on credit rating.
Below is the verbatim transcript of Dipan Mehta, Prakash Diwan and Ambareesh Baliga's interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18.
Anuj: Your first stock is EPC Industries?
Diwan: That is right. I have gone with the latest upcoming theme in the market and that is agri. We have had a great bountiful monsoons, it has given enough purchasing power back to the farmers and this company EPC Industries happens to be a very strong pedigree. Mahindra has owned this particular company now.
What I have liked is the way they have transformed this loss-making business into profits. In fact, the last quarter was the first quarter where they reported a positive earnings per share (EPS) after almost 12 quarters. So that is a significant change in direction.
People know this as a micro-irrigation player. What I particularly liked is they have staked the claim to be one of the leading players in the agronomy business, which is right from crop rotation, crop selection, fertiliser selection, what kind of seeds you need to use. So it is much more advisory and solution base than just products.
They have a huge network of Samridhi Kendra. This is a company that you need to watch. It is not a stock that you want to buy on Tuesday morning and say, "Okay I will make money next week". This is a Diwali to Diwali kind of a story because I would believe the next year will also be equally promising for this company going forward.
Sonia: You have given our viewers, investors a lot of multibagger ideas in the past. Tell me what your stock is?
Baliga: After the last ten years, even the government is pushing for 2G ethanol plans, second generation. In second generation ethanol plans, it is only Praj. You don’t have much of a choice.
They are also there into brewery equipments which is also doing decently well and the last three-four years, they have picked up Neela Water Systems, which is basically into water and waste management. So that is a big area, which is opening up for Praj.
Looking at all this, the next couple of years should be extremely good and even the government has set aside about Rs 10,000 crore to buy fuel. So, if you are looking at the EPS, it is approximately about 5.8, which I am looking for FY18 -- at these levels it looks decently cheap. I don’t think it will be a multibagger like what we saw last time but then surely it should give decent returns.
Anuj: Could be two-bagger?
Baliga: It should be a two-bagger at least if you are talking of the next two-three years.
Anuj: Bharat Electronics is the stock that you want to talk about. Is this the pure defence theme that you are backing on here?
Mehta: Yes, absolutely. The first stock is Bharat Electronics and it is a bit of a long-term play and there are certain businesses where if you are a public sector undertaking (PSU), it has advantages and defence manufacturing is one of them. You have all the security clearances in place, the protocols are in place and there is definitely a preference price as well as volume preference given to PSUs.
We all have heard that the government is wanting to manufacture defence equipments within India. This whole Make in India campaign, a lot of it is focused towards defence manufacture as well.
Even when the government's focus was not there in defence manufacturing, Bharat Electronics has been a pretty steady performer. Last five-six years, almost about 9-10 percent type of earnings compounded and now with the kind of push, which is being given to defence, they can easily raise their growth rates to 15-20 percent or so.
What is most impressive is that in the last fiscal, they had a fabulous increase in the order book and this year also we are expecting another fabulous increase in the order book. In fact, the order book as of now is more than four times its present runrate as far as sales are concerned.
Q1 number was a bit of a disappointment because of certain deliveries being postponed to the next quarter, so there is an element of volatility as far as the quarterly earnings are concerned. There could be price volatility around the time of announcement of results but if you look at three-five year kind of a period then certainly BEL could be part of the core holdings.
In terms of risk factors, the most important risk factor is getting new orders from the government but we are fairly convinced that there may be delays but the large part of the defence spending will benefit Bharat Electronics.
Sonia: Vindhya Telelink is something that you are looking forward to as a multibagger idea over the next couple of years?
Diwan: What has happened is in the last few quarters, the company has transformed itself into more of an Engineering, Procurement and Construction (EPC) player than just a cable manufacturer. They have an extremely positive resonance in terms of the manufacturing capabilities undoubtedly but their Rs 215-213 crore topline in the last quarter gone by, which disappointed people on the operating margins, the component of EPC was much more. We are almost like Rs 160 crore plus whereas the cable business was smaller or just one half of that.
So, what is going to happen is Vindhya Telelink will have to get rerated in that perspective. It is even currently available at just about under 12 times trailing basis. So, it is not like an expensive stock though it looks optically higher at Rs 700 or whatever. So quite promising but probably a little bit under-discovered is my view. So give it a target of more than Rs 1,000-1,100 plus and you could probably be surprised.
Anuj: A lot of people don’t know but stocks like CRISIL have made a lot of money even in a lot of wealthy individual's portfolios and you have chosen from that same category, Care Ratings. That is interesting.
Mehta: That is right. Credit rating and analysis -- we prefer it over CRISIL because it is a pure play ratings agency. CRISIL has got a lot of consulting business where there are certain challenges and it is struggling with growth over there. On the other hand, CARE which is focused purely on credit rating has done exceptionally well over the past couple of quarters or so. In the last quarter, they had fabulous volume increase in the number of debt products that they rated almost more than 40 percent.
This is a fantastic business because you go ahead and rate a product and you get the annuity income as well and as and when your revenues increase, your cost do not increase in a commensurate manner so there are huge operating leverages over there. So the basic fundamental of the business is exceptionally good.
At the same time, look at the trends, which are playing out over here. Reserve Bank of India (RBI) wants the larger corporates to go more and more towards the debt markets. It is making banks reduce their lending to the large corporates. So, we are going to have many more debt issuances coming in from the corporates.
At the same time, I think when it comes to medium-term and small enterprises, they are also looking at compulsive rating for that segment. So the overall demand for rating services is going to remain steady to increasing and with the economy picking up, with interest rates coming off and with the debt market becoming more and more vibrant, CARE will definitely get good volume going forward.
The beauty of the business is that the revenues will keep going up at a particular rates at 8-10-15 percent but profits will grow at a much faster pace because the cost remain in control.
Sonia: Infrastructure companies are most concerned about their ratings. Infra companies have eroded wealth for a lot of shareholders but you have picked up Sadbhav Engineering from that space?
Baliga: Because things are going to change for the infrastructure companies. Sadbhav anyway has been doing decently well but overall for most of the infrastructure companies, although the orders are flowing in but the issue is with the assets that they have in their books, road assets and irrigation assets.
Life would change for most of these companies once you have the infrastructure investment trust, which should be coming up sooner than later. Already, Securities and Exchange Board of India (SEBI) has cleared about four applications. So what would happen finally is the real build-operate-transfer (BOT) to these trusts, to these funds. So when that happens, you will have all these players becoming pure EPC players and today if you notice, the infrastructure companies, which are pure EPC players are getting a much better discounting, much better valuation than the ones which are asset heavy. So going ahead, most of them will become asset light since they will be transferring their funds.
As far as this space is concerned, close to about one lakh crore worth of tendering would be happening and I see Sadbhav possibly participating in about Rs 15,000-20,000 crore worth of assets and out of that, their orderbook can move up by about Rs 6,000-7,000 crore as compared to about Rs 2,000 crore last year. They are also there into irrigation projects and even there we see a huge boom going ahead. So, looking at all that, I see FY18 EPS to be approximately about Rs 13.5-14 and about 21 times looks decently cheap looking at the sort of growth going ahead.
For entire discussion, watch accompanying videos...