Why Neeraj Dewan is bullish on Kalpataru Power

“Kalpataru Power and their other company JMC Projects is getting merged and will become a bigger company. They have a strong order visibility with orders worth Rs 36,000 crore plus. Another Rs 15,000-20,000 crore of orders will come this year,” says Neeraj Dewan, Director, Quantum Securities.

How are things?
Things were looking very good till that Jerome Powell statement at Jackson Hole.

Markets recovered yesterday. Why are you sounding so depressed?
I am not sounding depressed at all. I still feel that the market had much potential.

What has been your house advice? Where are you going to be shopping in this decline?
We had a list of stocks for the earlier correction when the market went down to around 15,200. In the initial leg of 400-500 points we are not able to participate but then we thought that we are getting good bargains and why not start investing but those stocks have all gone up.

Now one has to look at new stocks but there is definitely going to be some period of volatility and with interest rates the way they are looking, one need to look at stocks which are going to benefit from the commodity correction and where the order books are good and where we have a visibility for the next two-three years of earnings.

There has been some improvement because of the opening. I do not see any let down there based on normal consumer spending which definitely will keep on picking up. Stocks in the infrastructure, engineering sector should do well as also capital goods and consumer facing stocks where there definitely will be further scope for improvement.

As India gets 5G ready, Reliance Jio will be ready by Diwali. We are still to hear from Airtel. What could be the ancillary telecom stocks that one should have on their radar?
There are optical fiber makers like Tejas Network, Vindhya Telelinks. Tejas did very well initially but it has been consolidating for some time. We saw a big move yesterday. These are the companies which will benefit because we need that last mile connectivity and the layout. Besides this, there will be other equipment manufacturers which may or may not be Indian companies. Now they can also contribute. But there would be these three-four companies which are into optical fiber and layout of the connectivity.

Cochin Shipyard is looking extremely strong right now, Mazagon Dock, BEL, they are all looking very strong. Anything from within this theme which is a fundamental buy even with the runup in the stocks?
Yes, the defence stocks have been seeing a very good run up recently. We have been positive on BEML and even positive on Mazagon Dock. BEL is a little overpriced with the kind of runup because it has been the most popular stock which started moving much ahead of the other stocks.

I think BEML, Mazagon Dock, Hindustan Aeronautics are still not stretched valuation wise. So there may be some consolidation but these stocks still have potential value wise.

In the case of BEML, once the demerger happens, those will also get listed and will have a separate value. The current company with some private players coming in has a lot of scope. I like the defence capital goods engineering stocks like BEML, Hindustan Aeronautics and Mazagon Dock.

Everyone seems pretty upbeat on Eicher Motors. Are you jumping on the bandwagon?
Actually autos have done very well and now even Eicher Motors and Bajaj Auto have started participating. Definitely there is going to be some improvement because commodity prices have eased, steel prices have also come down and they are likely to be a little down for some time so margins will see improvement.

There is definitely some more scope for improvement in stocks like Eicher Motors, Hero Motor and Bajaj Auto because they started contributing later. Valuation wise, they are at an average valuation, not cheap, but not very expensive either,

But looking at the kind of runup we have already seen, there may be some consolidation, some pause at these levels. If one invests now, they will have to wait for some more time to get a decent return. If you are already invested, stay invested but for fresh investment, look at some dips to get into these stocks.

The capital goods sector is standing out. The infrastructure push or the mahakumbh of capex is the cycle that we are in. If you take L&T out, what would be your preferred bets as far as this sector goes?
There is one stock which I like which I have been recommending earlier also. It is Kalpataru Power. Their other company JMC Projects is getting merged with this and so they will become a bigger company. They have a strong order visibility with orders worth Rs 36,000 crore plus. Another Rs 15,000-20,000 crore of orders will come this year. They had revenues of Rs 12,000 crore last year both combined. They have three years visibility plus they are very attractively valued.

If we still value it at 8 times, we get a 30-40% upside. This is the company I like in the sector. Valuation wise, it is very attractive and they have a strong order book and the commodity prices correction will help in their margins. Plus the merger of both the companies will help in the margins and so the next two, three years look very good for Kalpataru Power and JMC together.

Considering tomorrow is a trading off, today the market is going to try and anticipate and build in what the monthly auto sales data is going to be when it comes out tomorrow. Will we see a significant recovery and is that the reason why Escorts was all excited yesterday?
As far as auto numbers are concerned, the expectation has also come up now because we are expecting good numbers. But then again, we have seen a strong rally in auto names. They are the ones which led the rally and they are still trading strong.

So, auto numbers should be very strong but in this market setup, it will be difficult to say whether one should enter at these levels because Escorts, even after the buyback had come down to Rs 1,500-1,600 levels. But it has now come up to Rs 1,900 plus. So, we have seen a strong recovery there also and one needs to now watch how the market setup is.

Crude has inched up, globally things are not looking that great for the short term. Let us see how stocks consolidate and then take a fresh call on where to invest now at what levels.