Stock picks of Niraj Dalal of 3A Capital Advisors:
Stock picking philosophy:
(i) One thing that you need to look out for is a company which has good management. A good management means a management that understands the business, does not take undue leverage because a lot of good companies have gone down the drain due to undue leverage.
(ii) The other thing is opportunity for growth. When you invest in a company you look at the growth.
(iii) Choose companies that have gone through a very strong investment phase where they have done a lot of capital expenditure (capex) and will now reap the benefits.
Cipla – great management, growing at 40-50% CAGR:
Cipla has great management in the form of Yusuf Hamied. He has great integrity and great understanding of the market. They have the right kind of people in charge. In terms of growth, Cipla has sales of around Rs 10,000 crore. Over the next couple of years it may grow about 40-50 percent. So you are talking of sales of Rs 10,000 crore going to about Rs 14,000-15,000 crore. It is a large cap company with market cap of around Rs 45,000-50,000. Cipla is quite a stable kind of stock that you could recommend to any investor who wants a 35-40 percent Compound Annual Growth Rate (CAGR) over the next couple of years.
Cipla is preferable over Sun Pharma because it has the Ranbaxy acquisition on its hands right now. It will take Sun a year or so to digest the acquisition and get the economies of scale. Cipla has already gone through the investment phase in 2012-13. It is now looking at sales growth. All the inhalers and all will be launched across, the ARV portfolio should be doing well. The margin should expand from 20-21 percent to about 24-25 percent. When you have a large cap company which grows at about 20-25 percent sales growth with an EBITDA margin increase of 300-400 points over the next couple of years I don’t think you need to look further.
The numbers just add up. You are talking of an earnings going from about Rs 16-18 to about Rs 27-28 in the next two-three years, to be that it is just good.
Dish TV – great time to buy the stock because it is an inflexion point:
We have done two phases of digitisation. Now December 2016 is the deadline for digitisation. Dish TV has about 1.2 crore subscribers. It is adding about a lakh subscribers per month, which is an average run rate for last six months. Dish TV is the only listed player. Dish TV has acquired the mass. If it has about 2 crore subscribers in the next may be 3-4 years that is great.
This is a perpetuity business model. Once you have a cable connection in your house you don’t end up withdrawing it or removing it. The ARPU that Dish TV generates right now is about Rs 170-180. A cable TV connection does not cost less than Rs 300-350 minimum. So, the ARPU can only go up. A subscriber base with Rs 300 of ARPU means about Rs 350-400 crore per month. That translates to about Rs 4000 crore per year. That is enough size for a company to generate significant cash flows. It has done all the hard work till now. With a run rate of 1-1.5 lakh per month it should reach about 2 crore in the next 3-4 years.
In terms of the opportunity a lot of digitisation will now happen in the tier II towns and all of those places. Putting physical wire there is difficult. Dish TV specialises in the rural, semi-urban areas. So, the opportunity for Dish TV as compared to other players is far higher.
The stock has not performed for the last 3-4 years. It is a rank underperformer. They are getting their act together now. There comes a point in a business when it reaches an inflection point, I think Dish TV is there. If you just do basic numbers it is impossible for Dish TV not to breakeven and start generating cash flows in the coming year. Once that starts happening, it has not happened till now, it has always disappointed on the results front. If you are an investor that is a great time to buy a stock as long as you believe in the fundamentals of the company. I think the fundamentals are there for anybody to see, anybody who has a calculator to do math will be able to make the numbers for Dish TV.
Delta Corp – proven business model with huge cash flows:
The gaming model is proven in Goa. They already have 2,000 gaming positions in Goa. They have about 1,200 which will go live as and when they get the license for Daman. The management has now focussed on the core business everything else is out of the way. You are looking at gaming positions doubling in a couple of years. The license may come next month, it may come in a year, whenever that happens. So the EBITDA margin in the gaming business is very high. It is always loaded in the favour of the house. So, if you were to run or look at the business a 27-28 percent margin can easily shoot up to 40-45 percent when the additional gaming positions come into play. They have gaming revenues about Rs 250-300 crore about last year. You are looking at that number going to Rs 500 crore the moment you have a full year of operation for Daman. And casinos everywhere else are basically cash generators. Huge amount of cash flows. Once they are stable and keep running. You can always have ups and downs in the business which happens in Macau or anywhere else in the world.
The one big issue with Delta is the legal or regulatory environment. Having said that once the model is established, it would be surprising if something untoward happens on that front. For Goa when mining went away casinos are the biggest revenue generators for the state.
The gaming business is in full swing right now.
Stock picks of Manish Bhandari of Vallum Capital:
Pennar Industries – will benefit from huge operating leverage
We are very bullish on the industrial recovery and that would drive lot of companies and lot of growth in lot of companies. This has also to do with the stable government and Narendra Modi’s personal agenda in terms of putting up the whole capex plan back into the rolling. One thing which is common in the macro theme is that you have lot of operating leverage sitting in lot of these companies. What operating leverage would mean is that you could generate a significant higher amount of sales with very low capex and that is what an equity investor would love or shareholder would love.
What is interesting about this company is that you have a company 6-7 years back used to be a small mid sized steel producer and last 6-7 years of downturn has taught them significantly how to make themselves a steel converter to a very significantly high value add steel products which includes the hydraulics, which include the railways. They are one of the significant suppliers for products to railways to creating a complete new business out of steel to called PEBs which is pre engineering building. So, today if you look at USA 70-80 percent of USA is built on PEBs. So, you don’t build a concrete, you build PEBs-based businesses, PEB-based industrial infrastructure and everything which is a superior technology. So, this is the ability of the management to create a new vertical within itself. They are not just another steel player who has just been waiting around for a turnaround. They have created the new zones and profits areas and verticals which speaks highly about the quality of the management. There is also lot of credit with the second generation of management which has joined 8-9 years back and it has created this. So, we are looking at a situation where it is really difficult to see the compounding of the earnings because if the IIP grows at 8 or 9 percent these companies will do very well. So, Rs 1200-1300 crore topline company can achieve Rs 3000-3500 crore sales with a mere investment of Rs 50 crore per annum.
Shilpa Medicare – good management with huge scale of opportunity
Shilpa Medicare has compounded shareholder wealth by 46 percent every year. The market cap of Shilpa Medicare is close to Rs 2000 crore today. Market cap relative to the size of opportunity they have in the global oncology research – CRAM space is significantly high. So, this would have said very well about Divi’s or any other CRAMs business. As long as you can deliver a superior value to the customers on the global pool and the pool of the profit is significantly higher is where the valuation would get built in and the earnings would get built over a period of time.
Shilpa Medicare’s story has just started and it has a very long journey for a very good and stable management. Definitely, the management has significant advantage and edge on their side.