In an interview to CNBC TV18, Daljeet Kohli has discussed his favourite stocks and explained why they are compelling buys.
Lumax Auto Technologies – fast growing business, low valuations:
In Lumax Auto Technologies the price target is Rs 570, current price is Rs 295-300 odd level. This call is purely on the basis that they have added to new products which will be big road drivers for them. One is the automatic shift gears, when you see all these smaller vehicles now or even Celerio is coming in automatic version and for that you have automatic shift gear for automatic transmission you will need this kind of a product. So the company in the last six months have started it and the contribution is small but in next two to three years we feel that can be a very large contribution. They have already got Maruti on hold, they have already supplied to Zest.
The company have also started exhaust systems for other vehicles like Telco and other companies. So these two businesses are growing very fast and the other one, they have just started which is a new unit in Karnataka for Honda where they are supplying plastic moulded parts which again is a very high growth driver. The valuations are as of now trading only at 5 times, so even if it just moves while say 7-8 times your target price will come.
HSIL – Cera Sanitaryware in the making:
Hindustan Sanitaryware & Industries (HSIL) has two businesses building projects and glass divisions and container which is what they call as packaging products now because there are PET bottles also besides glass. This building product business last quarter did not perform well because there was too much of channel inventory. What we believe is that this time inventory has been created, so you will get numbers there and therefore it will come back to 20-25 percent growth on the revenue part in building products. So year on year (Y-o-Y) growth will be still lesser but quarter on quarter (Q-o-Q) will be much higher on building products.
Margins in building products are very good. The problem area was container division which is the glass business. In last two quarter we have seen that there has a curtailment of capacity. HSIL and Hindusthan National Glass and Industries’ capacities has been kept ideal which has given them the pricing power and as result though the topline has not grown so much but the bottom line which was negative has turned into positive which is what is going to add to the consolidated number.
Over a period of time they will ultimately either demerge the two businesses and get them listed whatever corporate action they will take but as of now they have not announced. The other positive is that they have just raised Rs 250 crore through QIP which will go back into debt repayment. So that will bring down the interest cost.
Overall we feel that in terms of its building products business it is a still at a discount to Cera Sanitaryware where the valuation catch up can happen. If glass container division starts performing well again there is value there. We feel that there is lot of value still left in the stock. Depending upon corporate action this value can be unlocked much faster. So we still like the stock.
Aurobindo Pharma – fast growth, reasonable valuations:
Pharma sector as a whole is a very heterogeneous sector, so each company performs in a different manner and depending upon like most of the companies they are driven by US FDA approvals, what kind of approvals they get and what is the product that they have got the approval for. So it is more important to look each specific case separately.
Overall if we take a call, it is very clear that most of the companies are overvalued 27 times, 30 times of FY16-17 numbers. This means that market is expecting a growth of more than 20 percent on their numbers quarter after quarter for next 2-3 years which right now incidentally for last two quarters is not the case. This is because if we talk of FDA approvals, for FY15 the number of US FDA approval for Indian companies has come down by half. It is actually 57 approvals through out the year that they have given versus 100 approvals that they gave in FY14. If we talk of quarter IV particularly then it is only 5 or 7 approvals which have come, 5 approvals have come for Lupin which are very small products but others are only 1 product each. Even Sun Pharmaceutical Industries didn’t get just one and Dr Reddy’s Laboratories got nothing.
When you have no approvals that means no new products will come, so your big growth numbers cannot come. It is only the existing products where you will gain the market share and there the pricing will also go down and margins will not improve. So our understanding is that Q4 numbers again will be muted set of numbers. Small loss in US will be made up by a better performance in domestic formulation business. We are expecting versus 13-14 percent normal growth, this time it could be 17-18 percent growth from domestic business. Companies which have a little more domestic business, they might be slightly better in terms of quarterly numbers.
We like Aurobindo Pharma, they have filings of 374 ANDA out of which 100-80 are pending and somehow they have been consistently getting those approvals. Which means their systems are in place and recently two of their units were inspected which went through absolutely without any hackles. This means that they will continue getting these approvals. In terms of valuations, Aurobindo Pharma is still trading at FY17 numbers only 17 times. Whereas normally midcaps or these kind of companies will trade around 20 times. So the valuation comfort is still there. All other companies’ valuations are way beyond.