Tulsian tells: Why DLF-GIC deal will cheer the markets

DLF, one of the country's largest realty developers, has entered into an exclusive pact with private equity firm GIC to sell a minority stake sale in its rental commercial property arm, DLF Cyber City. SP Tulsian of sptulsian.com feels the markets will be cheered by his development as it could significantly reduce DLF's debt and will give them the breathing space to raise further money for expediting their completion of the projects in the NCR region.Below is the verbatim transcript of SP Tulsian’s interview to Anuj Singhal and Surabhi Upadhyay on CNBC-TV18.Anuj: I wanted your reaction to the story that we broke on Monnet Ispat. JSW Steel has of course bid, the government may be asking Steel Authority of India Ltd (SAIL) to also put in a bid. How would you react to that news? A: Having heard Sandeep Jajodia of Monnet Ispat and the way he has described that the six suitors were got reduced to just one as a serious buyer, JSW Steel, because if you see in the steel space, everyone is seen a causality whether you talk of Essar Group or maybe Steel Authority being a public sector company or maybe even Tata Steel because of the Korus presence and all that and you can even add Jindal Steel and Power also, everyone is debt ridden or not in a position to go for any acquisition. So, the only company left is JSW Steel which is seen the most fittest and the most profitable and the kind of EBITDA margin now we are seeing for the integrated steel makers at about Rs 12,000 per tonne, so, I think that this seems likely that JSW will be keen to acquire this 1.5 million tonne plant which is seen quite good because this a newly created plant, it is not even one decade old. As Sandeep Jajodia said, about 9 lakh tonne is the operational capacity. We have to take a call on the other valuations also, the assets which the company is owning like power generation, or maybe stake in Odisha Sponge and other mining assets and all that, so, yes, this seems to be a very good fit for JSW Steel. Now, it is just a matter of valuations. If the news report which the channel has aired that JSW has offered at 22 percent of the debt and even if I presume the debt at Rs 9,000 crore of the interest having accumulated thereon of Rs 6,800 crore, then also I think it will be a bargain for JSW Steel. Even if they are able to get this for maybe 30-35 percent of the debt as seen as sustainable, I think this will be seen as a very profitable acquisition by JSW Steel. Surabhi: What are your thoughts on the numbers that we have seen, the market has not been astatic even though Royal Enfield continues to clock over Rs 50,000, compared to some estimates it is still less, Maruti Suzuki up 10 percent, and now Mahindra and Mahindra (M&M), how are you reading the picture for February? A: If you see the 28 days of February, though some analysts may say that things are not relevant, but I will take that as a relevant point and in spite of the apprehensions going on maybe on the – I am not talking of the demonetisation but more because of the BS IV kind of things, maybe the production is seen having curtailed because the producers or the manufacturers of the automobiles have to clear the old inventory also. So, when you talk to them, they say that they have been cautious and they don’t want to take any chance. Maybe even they won’t mind cutting the sales or maybe the production but want to have smooth migration from BS III to BS IV which there is no clarity whether that will get enforced from April 1 from the registration date from the dispatch date.So taking all this into consideration, maybe I won’t be disappointed to see the sales number of any of the company whether you include Maruti or you take even the Royal Enfield also and if I take a call on the Mahindra and Mahindra tractor sales, they are looking quite convincing because if you see the rabi season having sowing got over and you generally see the tractor sales getting tapered off and if you have a tractor sales of 15,000 vehicles against 14,000 or maybe sub 15,000 for the preceding month, I think they are looking good. The only disappointment which I have seen is on Atul Auto which has just announced the monthly sales number where the sales are down and that may be a disappointment, but otherwise on SML Isuzu, Royal Enfield, Maruti, M&M tractor sales I am in fact satisfied with the performance of the companies. Anuj: What is happening with the real estate stocks, of course DLF is news driven but smaller ones, Sobha Developers is on circuit, we have seen big moves in Kolte Patil, Indiabulls Real Estate, anything that you would want to buy at current price? A: I think that Sobha seems to be the trigger for all this real estate stocks and I honestly don't know what is the reason for Sobha to move up by 20 percent, but if you take a real estate stock call, I have always been saying that I am keeping a positive bias on tier II and tier III stocks, not on the Mumbai based real estate stocks because in Mumbai, still you have not seen the off take happening in the residential real estate market. However, when you talk to the tier II and tier III cities or maybe the cities like Ahmedabad or maybe Bangalore kind of things, the things are really picking up quite fast because the reduction in the selling prices of the residential flats have seen started happening on the ground. We have seen the reduction of about maybe when you talk to them about Rs 250-500 per square feet and probably that is giving a good hope of a better sales figures to be seen from these companies. So, maybe keep a view on the tier II, tier III real estate stocks, but honestly I don’t know the specific reason, it could just be a sector rotation or the renewed buying seen led with the trigger or maybe with the renewed buying seen in Sobha Developers today. Surabhi: Just talking about the possible trigger, if we do get this DLF announcement the market has been awaiting for over a year now, the numbers that are floating around indicate that if they sell 40 percent in this rental arm, then they might fetch around anything between Rs 12,000-14,000 crore. Is that going to be a decent number, will the market be happy with that and then again from a stock call point of view, Rs 100 to Rs 150 already on DLF in the last few months? A: Market will be more than happy with that because if you take a debt position now of about Rs 24,000 crore and if they are able to bring it down to Rs 12,000-14,000 crore, the indications given by the management has been at Rs 17,000-17,500 crore. So, that will give them the breathing space to raise further money for expediting their completion of the projects in the NCR region and that will be seen quite positive. So, actually this belated move of the realty or maybe the annuity projects not getting monetised of 40 percent seem to be the laggard from the stock for last couple of years. If that happens at Rs 14,000 crore, that will be seen quite positive by the market.Anuj: Is D-Link India on your radar?A: On February 17 we had given a buy call on the stock. They are providing end to end connectivity solutions for 3G and 4G. D-Link Taiwan is holding the stake in the company, operating profit margins have shown a margin of about 7 percent for Q3 with Q3 EPS seen at Rs 2.5 against 9 months EPS of closer to Rs 5. We have been keeping very bullish view only because the company is 2G, 4G end to end solution provider and they are leader in that space.As I said we have given a buy call last week on the stock, so we continue to have a positive bias on it.Anuj: What are your thoughts on Escorts, the stock has run up a bit. A: If you see the relative performance of the tractor sales, Escorts has shown a better number. Against 3650 vehicles on a month on month basis to 4250 against Mahindra and Mahindra having shown flat kind of performance of 15000 tractors. The stock is quite expensive now at Rs 465.Anuj: At Rs 1360 is risk reward still favourable in M&M?A: I am keeping a positive view on M&M but with a little longer horizon, maybe with 6 months and so. If you see the consolidated performance also, first on a standalone basis I don't see that there is any kind of reason to get nervous about either on the tractor sales or on the passenger vehicle. However if you see on their consolidated operations also, I am highly bullish on M&M Finance and that can be seen as a big positive trigger for the consolidated performance also. In fact this is the typical behaviour of M&M that whenever it starts moving up it takes a very long time, maybe couple of months the stock gets accumulated and once it starts moving up it shows a swift up move of maybe closer to about 10 percent or so in matter of couple of weeks. So, I am keeping a positive view but with a little longer horizon.Anuj: What are your thoughts on Gail? A: Gail I think is seeing the profit booking now because the stock if you take a one month call, the stock has risen by about Rs 30-35 and maybe below Rs 500 we may see again the renewed buying coming in, but I am keeping a positive stance on Gail going forward.