Tulsian's picks in digital space, OMCs and others

SP Tulsian of sptulsian.com shares his take on his picks within the constructuion space, outlook on crude derivatives prices and the impact on companies and stocks that can be played on the back of government's push towards digitisation. Below is the verbatim transcript of SP Tulsian’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: The road ministry is amending payment plans for hybrid projects. They are going to provide 10 percent of hybrid project cost upfront, your quick comment on this news?A: Maybe I will take a positive view on the pure EPC players because if you see the hybrid, the hybrid companies have already seen the very stressed balance sheet. The kind of debt they are all carrying. I don’t think that the liquidity problem can really improve their financials. Definitely, that will ease their liquidity pressure, there will be some, maybe the relief in the working capital but that is it. If you see the situation will really get accelerated going forward and those who are pure engineering, procurement, construction (EPC) players they will tend to gain more than the hybrid players. Latha: I wanted to ask you about the crude derivative plays as well. You have correctly being maintain a negative stance on tyres for other reasons, the higher prices of crude and crude derivatives makes life a little more expensive, difficult for them is there any space at all that you will play in the positive because of the rise in crude prices?A: If you take a positive side of it I don’t think that much is seen. Maybe oil marketing companies (OMCs) are looking good because I have been taking a contrarian view on the OMCs. If you see the pass-through of the product price hike has been very smooth and seamless on fortnight increase which we are seeing on the petrol and diesel. In fact they make the inventory gain, inventory of about 7 to 10 days which are generally held by them on the crude account are seen quite high number one.Number two if you see the situation going forward apart from this beneficiary being the OMCs I don’t because if you want to take a call on the upstream also I don’t think that situation can really be seen positive for the ONGC and Oil India maybe beyond as such they have all been screaming for a realisation of about USD 55-60 per barrel. If we see the international crude hovering at around USD 54-55 they will be having couple of dollars lower realisation. If you come to Cairn India, having merged on or the merger having been in the pipeline with Vedanta they are also not seeing the big beneficiary. So, overall I am not seeing much benefits flowing in because of the crude increasing except to the oil marketing companies. Latha: One final question in this theme, Varinder Bansal was pointing out in the morning that Pidilite Industries also uses Vinyl Acetate Monomer (VAM) and that prices have risen. Pidilite has also fallen a lot in recent months have you a view on that stock?A: If you see again benzene based chemicals which are all the petro chemicals and yes VAM they are also, everything is crude derivative. Now it is only to be seen that what is the pass-through which is possible for these companies to pass on. We have seen recently the news today just in case of non-ferrous that Exide Industries have raised the battery prices by 2-8 percent because of the increase in the lead prices. Again as I have said in case of OMCs that the price hike is very seamless and very smooth, whether these kinds of things can be expected in case of crude derivative because there are many chemicals which are all benzene based.If you see maybe like Aarti Group they all have the benzene-based chemical which is again a crude derivative. So, I won’t be able to take a call on those things unless until you have the export of your major component which we see in case of Dye Intermediates or maybe in case of some speciality chemicals happening then it is okay. Otherwise, I don’t think that one can take a general call that things will be seamless and will be a smooth pass-through for all the companies.Latha: Lately are you playing the digitisation theme, any fresh research?A: We have in fact taken a very selective call and in fact if you see maybe two or three stocks we have taken call post this demonetisation. One was TVS Electronic and second was HCL Infosystems. However, if you really take the situation now the kind of run-up and this is what I have been sounding for last couple of days the kind of run up which we have seen I think the whole space has gone very risky. I think that people they don’t understand, they are just plunging into any software company those who have been providing with the weak credentials, with very weak financials. Even if you see the TVS Electronic having recommended I think we have recommended in double digit post this demonetisation and now it is ruling at Rs 220 more than 120-130 percent in this last one month. In fact I have sounded on that also yesterday also or maybe prior to that also in this last couple of days that even profit booking is advised by us there as well. It is very essential because, we are in fact more positive on the hardware company for the simple reason that analyst and the experts they don’t understand the software. Let us be very candid that they don’t understand the software business what kind of services and what kind of margin they are enjoying that is number one.Number two, if you see hardware the profitability can only get ramped up by the volume and most of the volume will come by the trading turnover which we have seen in case of TVS Electronic also. For the September quarter they had topline of closure to about Rs 750 crore which was for whole of FY16 at a level of Rs 600-650 crore. So, maybe beyond a point you can’t take a valuation call, so maybe we will take a neutral to cautious view and won’t hesitant in advising the profit booking also if the people those who have invested in many of the stocks like aurionPro Solutions and Nucleus Software, these kind of stocks that profit booking is advising all of them.