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Monday, March 31, 2008

Top midcaps: Adlabs, Parsvnath, Kotak Bank, Geojit

The midcap index is up and the breath is quite strong. Some interesting buys from outside the index as picked by Rajesh Jain of Pranav Securities and Sajiv Dhawan of JV Capital Services include Adlabs and Parsvnath Developers and Kotak Bank and Geojit respectively.

 

Jain like Adlabs, which he calls a heavyweight momentum play given its connection to the ADA Group. He added that not only has it been able to ramp up the business models, straddling practically everything except broadcast and telecast, it has also scaled up practically in every business, like processing. He likes Parsvnath Developers because it has a host of good developments across segments and also has a stake in the telecom licenses.

 

Dhawan likes Kotak Bank’s growth story which he calls excellent, especially because the branches are expanding and their presences all over India is also increasing substantially. Meanwhile, he like Geojit as it is reasonably valued compared to some of its peers and is less aggressive in certain areas. He also feels the potential upside is very substantial.

 

Excerpts of CNBC-TV18’s exclusive interview with Rajesh Jain and Sajiv Dhawan:

 

Q: Let us pick up the one that has been talked about a lot and probably has seen a lot of price damage as well, Adlabs. Is this a buy or a sell or an avoid for you, what would you do with a stock like this?

 

Jain: If you can live with quotational laws, keeping in mind the fact that Adlabs, apart from being an off-the-center stock is a heavyweight momentum play in the market, given its connections to the ADA Group, I think Adlabs is one of my favourite picks at this time. You are getting it substantially cheaper than the very high tickers that were flashing in the month of January.

 

Adlabs is developing into the second best integrated play in the entire media and entertainment sector. It has not only been able to ramp up the business models, straddling practically everything except broadcast and telecast, it has also scaled up practically in every business. Processing business they were the leaders in Mumbai and now they have gone on to Chennai and a couple of other centers in the country, growing at greater than 20%. Even though the share of the business in the Adlabs pie has come down, it is doing very well for itself which is the best processor in the country.

 

We are all aware of the success story of Adlabs in terms of multiplex screens, they are greater than 100 right now. Average realization per seat is coming down, but occupancies are fairly healthy and I think you see a combination of real estate, retail as well as multiplex play out there, which just by itself, makes Adlabs a great buy.

 

There are two businesses which are a bit risky at this time. Adlabs is moving very aggressively in the movie production business and also in the movie distribution business. Now both these require big ticket funding upfront and with the advent of UTV, Studio 18, Shree Ashtavinayak and the resurgence and even growing stronger of older players like Eros and Yash Chopra, I think this is going to be the 01 play for Adlabs, which is where investors need to be a little cautious. This is because investments are huge and if a big movie flops, then there could be significant loss of profit, even though most movie production today is always breakeven on the table itself.

 

So if you are able to live with all of this, and the fact that Adlabs is also raising funds abroad, I think if you buy Adlabs at Rs 500-650 range, you cannot go too wrong in it over a three year horizon. But investors must not forget that there is a tremendous momentum factor attached to it.

 

Q: You have chosen Kotak Bank from the private banking space. What is it that you like about the stock and why you have chosen it from the ambit, given the kind of price correction that all stocks in the universe have faced?

 

Dhawan: This is one bank which we have liked, it’s been multi-bagger for investors who have held on to the stock for last year. In this correction of the bank, in this subprime phase, you have seen big sell off in all the banks. Private sector banks have also been very badly effected, not just Kotak Bank. You’ve also seen some particular news on Kotak, which the management had to clarify.

 

The bank’s growth story is excellent, everyone knows that the branches are expanding and their presences all over India is also increasing substantially. This is one sector which the investors have to look at because, in the private banking space, it is indirect barometer on the growth of the economy. The potential mergers and acquisition is very real there, you see the smaller banks like Centurion Bank of Punjab and IndusInd Bank, some of the stock prices have gone up. In Yes Bank you see stakes being bought in.

 

It’s not different in Kotak Bank. If the stocks, from current levels of maybe more than Rs 600 levels, it represents a very stock from the limited downside. You are getting stocks with high valuations, but the growth over the next few years should offset that and the growth of the company will give investors very good return. It could be a multi-bagger in the next two or three years and with its aggressive management, don’t be surprised if you do see a stake sale in the future or this bank itself making some acquisitions, increasing its presence and growing even bigger in the next two or three years.

 

Q: You have got a buy on a brokerage stock as well. What is it that you think will be the kicker for Geojit, the fact that they want to muscle up their retail plans or that the I-banking tie up that they have going?

 

Dhawan: Geojit, obviously the focus with retail is that, the main driver for the stock was obviously the stake sell with BNP, which shot the stock above Rs 100. Everyone realizes that the valuations in the broking industry were very stretched and overvalued over the last several months with a lot of private equity deals and a lot of new listings.

 

I think over the next two-three years, there is going to be a substantial consolidation in the industry. The one caveat would be obviously that the markets remain sluggish and your reliance on retail brokerage income, which the brokerage levels are very low now so some of these companies could suffer. But at the current price again of Rs 40-45, you have to see it from an investment perspective because the downside is very limited.

 

It is reasonably valued compared to some of its peers, it is less aggressive in certain areas, I think the management has a cleaner and better reputation in maybe some of the companies listed and with a lot of HNI investment in the company, I think again, in this current market where investors would be very cautious of the potential losses they could have, you have seen a substantial erosion of maybe over 60% from its size with a downside of maybe 10-20% from the current levels. I think the potential upside is very substantial.

 

Obviously, if the stock crosses Rs 60-70 in the short-term, the temptation would be to pare some gains and take some profits, but I think the industry we will see that consolidation and I think it is going to be after the sell off again and in a sector where the money will come back into, maybe not so soon but definitely over a period of time.

 

Q: You have chosen Parsvanth Developers from the real estate pack, what’s the rating on the stock from this sector right now?

 

Jain: I would go slow on this sector and possibly even avoid it. But, for a play like Parsvanth, the advice would be to hold on, do not do something substantially new in this stock.

 

It is a good player, it has got good host of developments across three segments, it’s also got a stake in the telecom licenses, where there is a court case going on. But practically, in each of these areas, the SEZ’s and the telecom licenses, it’s a zero-one kind of situation. We do not see visibility in terms of the net bottomline contribution that the company would get, there are lot of war tips.

 

Now, in the core construction business, we like the inventory size that the company has. However, there are concerns on the input cost increases, the impact to the net realizations from sale of unit square foot, whether in the commercial space or the retail space. As such, there was tremendous momentum reflecting in the tickers in January and despite the shave off, there is still some more room for give ups.

 

The reason we are not asking you to sell at this point is because in the event of the market recovery, should the Sensex try to ploy back to 18,000 and the Nifty to 5,250, the real estate sector would benefit from the momentum gains just like an Adlabs would. To that extent, we would suggest you to stay invested in this stock at this point. Probably lighten your holdings once you are closer to 5,253-5,254 on the Nifty. But buy real estate only after you are reasonably sure on the input side cost impacts and the realizations that real estate players are getting. You would have no idea of that until after the June quarter numbers, which is a good six months away from now.

 

Disclosures:

 

Rajesh Jain

It is safe to assume that my clients & I may have an interest in the stocks/sectors discussed.

 

Sajiv Dhawan

It is safe to assume that my clients & I may have an interest in the stocks/sectors discussed.





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