Daljeet Singh Kohli of India Nivesh Securites sees huge potential in Eimco Elecon and recommends Oriental Carbon with a target of Rs 700.
Below is the verbatim transcript of Daljeet Singh Kohli's interview to Anuj Singhal and Ekta Batra on CNBC-TV18.
Ekta: I wanted to highlight Max India now in a lower circuit at around Rs 170 odd the view is that maybe the street is not factoring in 46 percent stake that they own in hospitals as oppose to 100 percent stake, your sense in terms of what the fair value for the stock is and in terms of an earnings valuations for say FY17-18 as well?
A: Yes I think market has actually gone a little bit overbought at the time of listing and probably the slip was that only which you mentioned about 46 percent stake. According to our calculation also if we give 18-22 times is the EV to earnings before interest, taxes, depreciation and amortization (EBITDA) normal range going for Apollo Hospitals or Fortis Healthcare which are two listed players and Max also has similar kind of business model, in fact, 60 percent of the hospitals are matured hospitals, so they are running almost 6-7 percent EBITDA, Apollo Hospitals on around 13 percent EBITDA.
Even if I give this similar kind of EV to EBITDA multiple, the EV value of hospital business should not be more than Rs 495 crore, so if that Rs 4,950 million. Now if we add that value of Max Bupa business at one time book value, then we should get around Rs 103-105 kind of price value per share for Max India and if we calculate the other way around normally hospitals you will calculate on EV per bed. If you give Rs 2 crore EV per bed then also this company has around that kind of 2,500 beds are already operational, so you will get similar kind of valuation.
What market is building in either two things one is that in next three years this company is supposed to double its bed capacity which is probably by 2022 they will reach around 5,000 beds, so what you are paying today is actually you are taking care of all next 3-4 years of growth today itself. I would suggest that if somebody is holding then this is the time to actually book profit here and re-enter at a later stage. Their business model is very good, they are doing all things good but there is a price that you have to pay for that.
Anuj: Eimco Elecon why do you like that stock?
A: The basic theme behind this stock is operational leverage. This company is into coal loading machinery basically so the major customer is Coal India, 90 percent of their business comes from them and they provide all this loading equipments. Sandvik Asia holds 25 percent in the company. Most of their equipment as of now are being used only for underground mining, now what we are expecting that because last 3-4 years economy was not in the very good shape, so Coal India was also not doing very well, but in last year Coal India has improved its performance tremendously from 2 percent growth rate it has gone around 8-10 percent growth rate. Now when this kind of growth will come in Coal India, obviously they will need more machines, more equipments and this company gets the advantage of that.
Second thing is that when they sell the machine they also have the contract for maintenance of that and spare parts. If we see last year FY16, 62 percent of the top line came from spare parts, which is again a high margin business, so you get a regular annuity business as well as you get more margins. Now what we are expecting that similar thing will happen in next few years also, so operational leverage will play, their turnover which used to be around Rs 2,000 million had come down to Rs 1,300 million.
We are expecting in next two years it will go back to that level and margins have been stable in last four years, so if they remain at this level also even then you have a doubling of the absolute number. So that is where we are actually recommending this stock. We are looking at a target price of around Rs 658 which is almost double of our recommendation price, but stock price has already moved in last 3-4 days, but still there is a huge potential to play out because of the operational leverage.
Ekta: The other one that you are looking at is Oriental Carbon and Chemicals lots of chemical stocks have been flying around, what’s so good or what’s so different about this one.
A: Don’t get confused by the letter chemicals there, it is a chemical but it is not that speciality chemical or those chemicals which are moving these days. Now this company makes insoluble sulphur. This insoluble sulphur is a vulcanising agent used for tyre manufacturing, so out of the total cost of production of tyre 3 percent is the cost from sulphur and this radialisation of tyres requires in a normal tyre if you need 1 kg of sulphur, where in radial tyre you will need 1.7 kg.
"So, the thesis here of investment is that as the radialisation of the tyre industry is improving, the requirement for insoluble sulphur will keep on increasing and we see that in cars radialisation is already 90-95 percent, but in trucks and buses radialisation is still at 30 percent, so if that keeps on increasing and we have compared in our report that with what happen in China, what happen in other economies when this process started and how long it continued, then we see that India is exactly at the starting point and for probably next 10-15 years we will have this kind of growth rate coming in the insoluble sulphur demand.
The benefit of Orient Carbon is that there are only 3 players in the world that manufacture this product. Eastman is the largest in US, then there is Shikoku in Japan and the third one is Orient. So it is an oligopoly market where there are only 3 players and this company is expanding its capacity which will come up in next two years, so an oligopoly market, 25-30 percent margin business and a huge market potential available to you all three make a for a very good investment rationale that is the reason why we recommend this stock and we have given a target of around Rs 700, I am sure as time will come we will improve this target also.