Thursday, May 17, 2018

3 solid contra trade ideas from ICICIDirect's Pankaj Pandey

How have you assessed Tata Steel’s performance? 

The numbers for both Tata SteelNSE -2.14 % and JSW have been quite strong. In fact, from EBITDA per tonne perspective, there has been a positive surprise. For both the companies. EBITDA has been in the range of Rs 1500-2000 per tonne. With firmer prices and better value growth, the prospects look quite promising for Tata Steel and JSW. 

The numbers have been quite strong. We would expect these stocks to keep doing well. But between the two, JSW looks more promising given that they have got aggressive expansion plans. 

Tata Steel came out with a good set of numbers but how are you looking at the entire universe of stocks in lieu of the earnings that have been reported thus far? Have you changed your view depending on numbers? 

From a volume growth perspective, there is no major surprise. But on the EBITDA per tonne perspective, there might be. So for JSW, the EBITDA was nearly Rs 12,000 per tonne on domestic business. For Tata Steel, the EBITDA per tonne came out to about Rs 15,800 per tonne and we were expecting somewhere about 14,000 or so. From that perspective, the numbers have come out stronger. The realisations have been quite firm for most of the flat players and we would expect that even for long players, the numbers would come out quite strong. In addition, though the coking coal prices have slightly inched up, with firmer prices we expect the margins to be maintained for both the players. 

With a volume growth of nearly more than 7% expected next year, both the stocks should keep doing well with firmer margins and firmer prices. 

What explains the kind of selling that we have seen in the broader end of the market? Some of the names from the mid and small cap arena, fell almmost 70 to 60 odd per cent on a three-month basis. The index underperformed compared to what the Nifty has done?

The action has been largely stock-specific in the broader markets. With crude prices going up and and inflation expectation getting higher, the multiple expansion for some of these companies could come to a halt and that has played out for them in the past two or three years. 

If the companies are displaying good growth on a standalone basis, then the price performance again would be depend on the kind of earnings growth. If the companies are missing on those parameters, then we are seeing a good crack or good profit taking panning out. But it is a very stock-specific market. Some companies continue to deliver a good set of numbers and in the broader markets,, there are companies where we have seen slippages. The markets have been punishing these stocks as well. I would say it is a very stock-specific market. 

Where would you be contrarian, if at all?
There are certain pockets or themes which we like. For example, if you look at the entire hotel as a space, constructively what we look at is the improvement in ARR plus occupancy rates and since in most of these companies, about 60% of their operating cost is fixed in nature, then with better ARRs and occupancy rates, we expect the entire pack to do well. 

We are quite positive on tyre as a space because last quarter, there was highest CV growth and six or nine months down the line, we would expect that the replacement demand to pick up. Accordingly, all the players like Apollo TyresNSE -1.39 % and JK Tyres should benefit from their replacement demand. 

In addition to that, electrodes companies -- both HEG and Graphite -- came out with a very strong set of numbers and we expect the prices to remain firm for the next few years. Even though these stocks have performed well, we expect the price performance to continue. On better margins and spreads, these stocks do not really look expensive to us. These are the kind of names which we have liked. 

The infra theme is already playing out and we continue to remain positive on the entire infra as a space. 


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