3 midcap stocks SP Tulsian says you shouldn't miss out on

Investment advisor SP Tulsian of sptulsian.com believes the recent SEBI order against the promoters of pipe manufacturer Welspun Corp will prove to be a blessing in disguise for the company. "I don't think that there is any problem—maybe some of the instances of the involvement of the promoters may have happened but the business model of the company is quite intact," he said adding, "This might be the much-awaited entry point for investors."

Commenting on his next pick, Tulsian says, Century Textiles can prove to be a good bet as he thinks the stock is greatly undervalued at current levels. "If somebody can keep a view of maybe couple of years, this should give a good return," he feels.

Tulsian is also upbeat on the prospects of Indian Bank. "My call on Indian Bank is purely from a short-term point of view—maybe for next couple of months—one can look for a return of about 10% from hereon," he explains.

Below is a verbatim transcript of Tulsian comments on CNBC-TV18. Also watch the accompanying video.

Q: Do you think Welspun Corp has bottomed out at these levels of Rs 150 or so and what kind of a target do you have on the stock?

A: The recent scam or the involvement of the company's name has given investors an opportunity—I have been maintaining that view since it has corrected to Rs 160. If I straightaway go onto the fundamentals of the company, I don't think that there is any problem—maybe some of the instances of the involvement of the promoters may have happened but the business model of the company is quite intact. You are going to see a topline of close to Rs 9,000 crore for FY11 with a cash profit in excess of or maybe close to about Rs 1,000 crore. That results into an EPS of Rs 40. We all know that the company is the largest pipe maker having global presence and even their order book is quite intact with order book of about maybe Rs 6,000-6,500 crore. Yesterday also we have seen company having received an order of about Rs 1,500 crore.

They have an order pipeline of about eight-10 months. They have the good presence in the developed market in US and all. So I don't think that there is any reason if you get a stock at a P/E multiple of close to about 4-4.5 times with a marketcap of just less than Rs 3,500 crore and even if you see on the debt front, the company has a net debt of about close to about Rs 700 crore. Even that can get paid off—in fact I see this SEBI move as a positive factor for the stock because right now there won't be any kind of dilution of the equity or any price movement. In fact, maybe the regulatory or the corporate governance at the company's level will improve.

So all these things maybe if I take a call that it can become a debt-free company in next one year or so with a P/E multiple of 4.5—this is the time where one should look to pick up this stock.

Q: You also like Century Textiles. Take us through why you like that story and whether it is undervalued at current market price?

A: In this uncertain market, because obviously I have tried to focus on the companies, which have a relatively good cash flow, intact business model, plus backed by the rich assets. Welspun Corp falls in that category on the same logic along with Century Textiles. We all know that they have a strong presence in cement, paper, textile, rayon, chemicals.

In cement they have a sizeable capacity of 9 million tonne; in paper they have 2 lakh tonne per anum plant. I am not giving any value—if I just take a financial performance, they will be having a topline of close to Rs 4,500-5,000 crore for FY11 with an EPS of quite close to about Rs 40 and cash EPS of about Rs 65. If I take purely on the financials and share is ruling at a P/E multiple of 10, which is in fact in line with other cement majors which have a similar capacity of 10 million tonne and above and they are in the process of expanding the cement capacity also.

But if I purely confine or focus myself on the property, which they are developing in Mumbai at Worli—they have close to about 40 lakh square feet of which part is under development, maybe some of the area is in dispute with Wadias—but if I take the net present value of the clear property, which is lying with the company, the net present value is close to about Rs 5,000 crore while the marketcap of the company is right now at Rs 4,000 crore with enterprise value of close to about Rs 5,000 crore because company doesn't have significant debt. It is close to about Rs 1,000 crore. The management has hinted that entire property which they will be developing over next three-four years is going to get leased out and if that happens, maybe 3-4 years down the line company will be having a rental income of close to about Rs 1,200-1,500 crore with the ownership of the entire property remaining with the company.

We have been taking call on the real estate stocks but they are in the process of selling the property, booking the profit but here companies will continue to enjoy the rental income. Company is going to keep the ownership of the company with the core business of cement, paper and textile remaining with the company. I see this stock hugely undervalued at close to about Rs 415-420, where it is now ruling. If somebody can keep a view of maybe couple of years, this should give a good return.

Q: Indian Bank has had quite a terrific run in the last one year or so though it has corrected a little bit. At these levels, do you think it looks attractive?

A: Maybe the disappointment came from the Q2 results and in the recent one week we have seen that all the banks, especially these midcap banks, have corrected by about 14-15% because of the fear of their NIM getting shrunk or maybe because the banks are forced to but I don't think that this is going to be such a serious problem because banks have raised the deposit rates by 100-150 bps largely on the short-term deposits, which ranges for about three months or so.

If I straightaway take a call on Indian Bank, they have the second highest—in fact I place in the midcap PSU banks, there are about 10-12 midcap PSU banks—they have the second highest NIM of close to about 3.7% against the average of 3.3% in case of other banks. So even if that shrinkage happens, I don't think this is going to be such a big disappointment for the stock.

Coming on the financial performance, they have an EPS of close to about 40 for FY11. They will be having a book value of about Rs 195 by March 2011. So taking P/E multiple call which is at about 6-6.5 times and price to book of 1.3 times, I think Indian Bank doesn't deserve much beating from hereon and if we have any indications coming in from the banks of increase in their benchmark prime lending rates (BPLR)—these all stocks can show a rise in the near-term as well. So my call on Indian Bank is purely from a short-term point of view—maybe for next couple of months—one can look for a return of about 10% from hereon.

Q: What about oil and gas specifically for ONGC? There is some news floating around as well on account of which ONGC has held up pretty smartly. Do you see that stock inching up higher?

A: I don't think that it is likely to move maybe beyond Rs 1,360 or Rs 1,380 but yes all the preparations are made by the government to have its FPO through and for that we are seeing this special dividend announcements, bonus and now even the dispute with Cairn on the royalty front is also likely to get resolved.

So maybe I don't think that there is any weakness for the stock falling below Rs 1,300 but I don't think that it can move beyond Rs 1,380 as well atleast in the month of December.

Q: What did you make of the Uflex episode yesterday? The Chairman is going to jail out there; stock tanked 20%. How would you approach it?

A: It is a very unfortunate incident and if you see the kind of rise we have seen in all these polyester film stocks, the kind of run up we have seen in Uflex also—apart from this incidents of Chairman awarded jail term of 4 years—you question the financial results having posted by these companies also because we have seen that maybe the call being taken on all these stocks with an expected EPS of close to Rs 200-300 per share with a profit of even the management of Uflex came on the channel and said that they are doing exceedingly well and they are going to see these kind of profits.

Now it reminds you that probably maybe the vested interest of the price manipulation on the stock exchange seems to be their intention. You need to examine all these results especially of these midcap stocks which are either driven by the management or by the operator with the magnifying glass.

Q: Do you expect the pressure on names like Karuturi, KS Oils, Murli Industries to remain? You were speaking about Welspun Corp, which is a good business, but some of these other two-digit kind of stocks—do you think they will remain under pressure?

A: It all depends because one needs to segregate these all stocks because if you see the fundamentals, maybe if I need to take a call on Sangam India, I don't think that there is much fall but if I need to take Murli Industries, I don't think that the much fall is likely because we know that we have the company backed by the assets and all.

But I have my doubts on the stocks like Karuturi Global, Midfield Industries, Thinksoft, maybe Shree Ashtavinayak, these kind of stocks are not having any business model, they have all been seen involved in the price manipulation. One cannot generalize the call, one needs to see the assets held by the company and the business model whether they can sustain the kind of performance, which they have been showing because obviously there will be doubt on the financial performance having posted by these companies also because they have all been done with a view to maintain the stock price.

So one has to be very careful but it is better and safe to avoid these midcap kinds of stocks where you have no clear visibility.

Q: Any thoughts on RPP Infra? The stock which listed a couple of days back, it has lost about 12-15%. Do you see it sliding more?

A: Yes, I think it deserves the fall of maybe about 30% more because I don't see value more than Rs 35 on the stock because we have the bigger players available at a quite attractive rate even after hearing the management, having order book of about Rs 800 crore and maybe the current performance and all that, does not justify price of more than Rs 35.

Q: A couple of these stocks saw a quite bit of beating yesterday. Would you look to accumulate at these levels—likes of IRB Infra perhaps or you spoke about Indian Bank but many other banks too like Dena Bank, Syndicate etc which saw some correction—any of these stocks that you like at these levels?

A: I am not negative from hereon on the banking stocks because as I said that all the stocks have seen a correction of 12-14% in this last one week and I think even if you factor in the deposit increase rate, which has largely been happening for the short-term deposit, it doesn't warrant this kind of correction.

So if I need to take a call maybe UCO Bank, Dena Bank, Indian Bank, these three stocks or maybe fourth Vijaya Bank looks quite good at these levels and overall my call is positive, I see a weakness of maybe about 1-2% on the banking stocks by and large but the chances of rise of about maybe 4-5% in this December series from hereon.

Q: What do you do with A2Z Maintenance—the issue which opens today? Would you buy it or let it pass?

A: I found this quite expensive at Rs 400-410 because if you see the present business model of the company, they are into the T&D but they have been more focusing themselves on the distribution front because on transmission you have the lower margin. Yes, they have done well on the distribution front but I think that maybe the saturation is coming up on that account. That is the reason we have seen that in spite of the growing topline they have seen the fall or stagnated EBITDA margin and now they have been focusing more on the scattered and the small business like the municipality waste management and the biomass power projects of 15 megawatt each at different locations.

These kinds of things are very difficult to manage. If I take a call on FY10 performance, the share is issued at a P/E multiple of 22-23 times. I don't think that it justifies and even if I take a call going forward for FY11, we may see an increase in the topline by about maybe 20-25% but the bottomline is going to disappoint with a fall in the EBITDA margin with fall in the PAT margin taking all this into consideration, I think the stock is quite expensive at Rs 400-410.

Q: What would you do with these two names, DCM which is down 20% today and Uflex down another 12%?

A: I think in Uflex you have couple of problems, one of the arrest of the CMD which we have talked just a while back and second is the fundamental call on the business because there has been drop in the film prices and even there has been ban on using the plastic films in Panparag and cigarette packaging and all that so that is going to keep the consumption down.

Coming on DCM, I don't think that there has been any clarity because the stock has been moving up largely because of the momentum play on the pretext of the company holding huge land bank in Delhi and all that. So maybe the stock is correcting because of that.