Auto sector is overpriced: Paras Adenwala

Do you think we can expect more profit booking, especially on the IT and auto front?

Auto, yes. I think it is overpriced. We have been hearing the plans of various auto major, global majors for India and that does not augur too well for leaders in India and therefore I do expect for the correction and variations are definitely not on your side. The low base effect is also getting over.

As far as IT is concerned, I think there is too much of concern on rupee appreciation against dollar. But what we really don’t accept and don’t understand is a fact that most emerging economies do BPO and IT services for US and other developed economies. They are also seeing an appreciation in the currency.

So India is not the only one which is seeing an appreciation in currency. Therefore what we need to check is the appreciation of Indian currency as compared to other emerging economies and I don’t think we really stand out very badly. Therefore this is more of a technical correction rather than a fundamental one. So I would not be too concerned on IT. I think I would go long on IT right now.

Do you believe small cap activity would continue?

I think at times when the economy is recovering, the percentage growth that one would see in the fundamentals would be significantly higher in small caps and midcaps as compared to large caps. There is also a valuation gap which continues between the small cap and midcap and the large cap. Therefore I am not at all surprised by the kind of moves that we are seeing in small caps and midcaps. I would certainly increase my position into small caps.

Healthcare was the big theme of the day. Is there any pick from that side?

One of them is in my recommendations today that’s Torrent Pharmaceuticals. So when we get into stock picks, I think that’s one sector where you are seeing tremendous amount of action. We saw the action in Strides yesterday after it tied up with Pfizer. We have seen lot of action in Dr. Reddy’s, we have seen action in Ranbaxy as well.

You name the stocks and there is tremendous amount of activity be it in terms of business deals, be it in terms of possibility of an M&A and don’t forget the domestic market which has also been growing in double digits. So I think all seems to be going well for the Indian pharmaceutical industry.

Any picks from the oil and gas space?

Aban yes. Fundamentally speaking, I think Aban is a very good pick at the current levels and it’s to start with a debt repayment story followed by an increase in oil prices. We have already seen them aggressively repaying their debt by raising equity and also selling off some of their assets. I think as oil prices increased we are also going be see an increase in realisation for rigs.

Therefore Aban, which is one of the largest rig owners in this part of the world, should do very well. It’s also among the cheapest rig owners across the world. So I think I would certainly expect at least a 50% appreciation from the current levels in Aban.

From the agri commodity space we have seen quite good run both in tea as well as sugar stocks. Are there any picks from that front?

There is one more pick that I have in my recommendations in sugar that’s Sakthi Sugar. I think sugar prices are on the move thanks to the huge amount of deficit and I don’t see any relenting in the prices in the immediate future. So sugar prices will do well for sure.

Tea prices have run up quite significantly and in the last option we saw some unsold tea at higher levels. Therefore there could be some pressure in the short to medium term but again demand supply clearly is in favour of tea.

Analysts are bullish about Reliance’s Lyondell takeover benefiting the company in the long run. What is your view?

I am very positive on Reliance for the long term. I think in the short term may be it’s a result of some stock rotation but over the long term I think there are too many positives for Reliance and if they can just go ahead and complete this acquisition I think that’s going to be a tremendous plus for Reliance Industries. So yes, I would be a buyer in Reliance for the long term.

What about the sugar pack - Bajaj Hindusthan in particular?

The number should be good. Sugar prices are absolutely on a track and there is no reason to believe that results can really disappoint. So I think I would be a buyer in sugar at least for this year.

Small cap idea that you have in today’s session. Banco Products - why would you buy that and what’s the target price?

This is an auto ancillary, which is among largest manufacturers of gasket and radiators in the country. This company was set up in 1962 by the Patel family and the track record of the management is absolutely impeccable. They have Mr Vimal Patel as the managing director someone who is really studied in some of the best universities overseas and has been at the helm for a while.

This company has about four factories in Vadodra all manufacture either in two gaskets or radiators. And the hallmark of this company is a fact that even during the downside they have been able to maintain the profitability and during upswing we have seen their operating margin shoot up beyond 30% which makes it one of the most profitable auto ancillaries.

In the current year I do expect the company to notch up very-very healthy growth - the first half is a kind of an example of it, the second half I think should be even better. The stock is available at just about 6.5-7 times for FY11 and the growth trajectory that is expect is at least 30 to 35% in the bottom line and at least 20% in the top line. The dividend payout for the last five years average is about 30% and the return investment again for the last five years average is an excess of 35% which kind of indicates this stock is very strong in terms of balance sheet, very strong in the way it is managed and has an impeccable position as compared to the competition so I would expect about 50% return in Banco Products in the current levels.

There has been some institutional activity in JK Tyre and Bharat Forge is going to raise funds. Do you like any of those?

Both the companies are doing well but I am not particularly kind of keen on tyre companies for the simple reason that ability to pass on prices of is very limited out there. Rubber prices have moved down and are now inching up once again. While tyre companies are talking about an increase in prices of tyres, the question is to what extent can they really pass on.

So if I one asks can take a long term view on tyre companies, the answer is no and therefore I would not really like to bet on them. They have already moved up quite significantly and from now on I would be little cautious on them.

As far as Bharat Forge is concerned I think that’s an interesting company because they are trying to reduce the reliance on the automobile industry and getting into industrials and also into aerospace. But for the valuations, I would certainly look at Bharat Forge with deep amount of interest. On a correction, I would certainly review my stance in Bharat Forge but for the time being I would not like to buy into it.

Why do you prefer Sakthi Sugars from the sugar pack? What about Bajaj Hindusthan?

Before I talk on Sakthi let me just speak about the standard disclaimer. I do own Banco, Sakthi Sugar and Torrent Pharmaceuticals. On Sakthi Sugar I think it’s a fantastic turnaround case. This is one of the largest sugar companies in south India and also in India. They have a capacity of 19,000 tcd. They also have a power generating capacity of 95 megawatts which is likely to be expanded to about 117 megawatts. They also have a distillery company and in the last three quarters - it’s a December year ending company - the turnaround has been absolutely fabulous.

The debt-restructuring is through and the pressure that they had on because of over burden of debt has eased out for the time being. The stock has done very well but I expect it to do further well for the simple reason that the valuations are absolutely in your favour. For calendar 2009 - that’s a year gone by - they are expected to do an EPS of about Rs 40 and in the next year I expect an EPS of at least Rs 45.

I would be like to be conservative there on current sugar prices which means on a historical basis the stock is available at about 2.5 times which is significantly cheaper than the industry average. The industry average on historical basis is an excess of about 8.5 to 9 times. On prospective basis this average is just about 6 to 6.5 times so the discount is an excess of 50%. So this has got to be corrected and therefore Sakthi Sugar should give at least a return of 50% over the next one year.

As far as Bajaj Hindusthan is concerned, the number should be pretty good but I like to be a little sceptical out there for the simple reason that there is a buzz about the raising another $250 million which would dilute their equity. Now we need to get into details as to why do they need that money the business is robust, is improving but constant equity dilution does not really go well with investors. So I would probe deeper into this plan of raising equity before getting into it.

Is Torrent Pharma a buy this morning?

I think this is an interesting company which has been by the way side for the last one month or so. This is a company which focuses on chronic diseases like cardiovascular diseases, gastrointestinal and CNS therefore the profitability is pretty good. They also have reasonably decent international business. They have subsidiaries in Brazil, in US and Europe and all the three of them are on an uptick. Brazil has been a little laggard but is really clearly picking up, 50% of the business comes from international business and 50% is local.

As far as local business is concerned, it’s extremely profitable. The international business after the acquisition has been turning around and on consolidated numbers the company is looking pretty good. It’s available just at about 11 times on FY11 basis consolidate numbers as compared to industry average of about 17-17.5 times. So again this is quoting at a steep discount.

The promoters own 72% of the company and the balance sheet is very robust so debt equity being just about one time or even lesser than that. The return on capital employed, the dividend payout, the dividend yield all of that pose in favour of the company. So I would be a buyer in Torrent Pharmacueticals with a one year perspective.

A stock or sector that you would be keen on.

One sector that I have spoken about earlier and which is really doing well after a long period of lull is textiles. I think we have seen the cotton spinning companies coming out with very good numbers in the first half and clearly that’s a result of in crease in prices in the cotton yarn and all of these have been laggards.

There is tremendous amount of scepticism for the sector is grossly underowned. So I think that’s a sector to really watch out. Is it for today the answer is no. I think it may be today onwards so we can really look at an investment position in textiles for with the one year perspective.

Have you looked at Siemens India?

While the business is great, I think corporate governance is not. I wish it were as good as that but looking at the traction that the whole sector is gaining, I would certainly want to really take a review on it. I do expect this sector pick up. We have already seen good order book growth in several companies like BHEL, ABB, Thermax and there is no reason to believe that Siemens would not really be beneficiary of that. So certainly I would want to review my stance on Siemens at the current levels with the positive bias.

You like Lakshmi Machine Works at 2000 odd is where it is trading at this point of time. Would you still go long on this one?

Absolutely with the one year perspective I certainly think Lakshmi Machine Works is a stock to watch out. It has all the qualities of an excellent stock, good management, excellent comparative position, good balance sheet and a turnaround in the industry. It is a textile ancillary.

It has a monopolistic condition out there. Its not as cheap as it used to be about a week or 10 days ago but certainly with a one year perspective I think it has elements off springing a surprise in terms of the numbers that it will declare. I would bet on the stock even at the current levels.