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Two stock ideas with 3x potential returns in 5 years

In an interview with CNBC-TV18, Niraj Dalal of 3A Capital Advisors outlined two stock picks that he believes have immense potential to generate outsized returns.

Speaking to Sonia Shenoy and Anuj Singhal, Dalal said he was bullish on Tata Global Beverage  and Dish TV , both of which have the potential of going up by three-four times in the next four-five years.

His thesis? “Tata Global has excellent brands and a great management. Moreover, it currently has low EBITDA but has excellent operational leverage,” he said. He added that were the firm’s operational efficiency to improve and EBITDA margin to pick up, the stock would get de-rated. “It won’t trade at 10 PE [that it currently trades at].”

The case for Dish TV was a “no-brainer”, he maintained. “Digitization is going to be the biggest driver of revenues there. The number of subscribers as well as average revenue per user is slated to go up,” he said. “I see it as a Rs 35,000-40,000 crore company.”

Dalal also said he was positive on the PSU bank space. “For India to grow at 8 percent, credit growth has to growth at 15 percent,” he said. “PSU banks have been getting their act in order [since the NPA crisis hit] and are available at extremely attractive valuations”.

Below is the transcript of the interview on CNBC-TV18.

Sonia: The last time we spoke with you you had given us a lot of interesting stocks names like Dish TV etc but before I go to your list I just wanted to know from you what your own view is on the market? Is this a good time to be buying stocks at all or do you think that one should wait for a bit and then one can get better levels?

A: It is very tough to take a call whether it is the right time or the wrong time. What one needs to understand and assess is he needs to look at the stock that he is comfortable with, the valuation at which he is comfortable with and then you do not look at the overall market when you are an investor. Yes the larger trend is important but if I have identified a particular stock and I like it at a particular rate, I will go out and buy, that is how I would want to be looking at the markets.

Having said that, we have had a rally to 9100, then a decline to 8300, a rally back to 8800-8900. We have again today broken lows of 8300, we have recovered so how do you define your thesis? I would say the markets can perhaps in the short term go to 8000 maybe 7900. It is always better to buy in the staggered environment. If you had bought something now of 25 percent if it falls maybe 25 percent more, some of the stocks you will have to accumulate and you will have to have the conviction to see a down tick.

We have had too many negative news flows in the last few days whether it is the foreign institutional investor (FII) minimum alternate tax (MAT), we have had the rainfall thing today which has happened, the only good thing is the global markets are in fine fettle. All the issue are to a certain extent domestic so we will get through them, whether the markets settles at 7900, 8000, 8200, 8300-structurally we are in good shape so if there are stocks that are available at valuations that you are comfortable with, you should go ahead and invest.

Anuj: So this year has been about bottom up stock picking. Last year was more of a top down approach, that would have also worked so let’s talk about some stock, you like Tata Global at current levels. What are the triggers here and why do you like this stock?

A: First of all Tata Global is a very tough stock to pick in the sense that it’s been in this range for close to two and a half, three years now. We have been in this zone of Rs 130-150, goes to Rs 160-180 so it is about Rs 7000 to 8000 crore of top line so the key points in Tata Global are this-excellent brands, great management, currently operating at very low margins so they have about Rs 7,000 crore of sales and about Rs 600 crore of EBITDA.

The key things with companies like a Tata Global or others are, there is a huge amount of operating leverage. A two percent swing in EBITDA will mean about two and a half percent gain in EPS. Now currently it trades at about, so it is about earnings of six and a half, seven rupees so you are talking of 12 to 15 multiple.

My sense is that as the brands mature and as a Starbucks which is getting traction, that happens – I see Tata Global as a Rs 10,000-11,000 crore top line with about a Rs 1,000, Rs 1.100 crore of profit. You are talking of 12-15 rupees of earnings; this won’t trade at a multiple of 10 with that kind of a pedigree. So the triggers are the brands maturing, operational efficiency is kicking in, operating leverage kicking in and hence a rerating over the next 12-18 months.

Anuj: What are the key risks here?

A: The risk is it is commodity business. A lot of people call it a brands business but I like to look at it-yes they are great brands and they are very well established brands whether it is a Tetley or whether it is Tata Tea in India, excellent brands but at the end of the day it is tea, 70-80 percent of business is tea so you are and it is across the world so you have lot of currency risks, hedging risks so all of that is there in the business.

Anuj: Diversification outside of tea has not really kicked off, that was something that they tried.

A: It hasn’t and it predominantly remains a tea business so yes they have tried it, it is not something that has gone as per what they would have liked but that is okay. The traction in Starbucks is excellent. They have about 60 plus stores, 70 actually, doing extremely well. You go to a Starbucks shop you see it, you know they are going well and lot of these things take time to mature but the thing that I have seen with some of these stocks and it is unfair to compare this with a Nestle or a Lever but you had a very long time even in Lever when it played between that Rs 200-350 band and every year, it was my top pick for three years and every year I was caned for it but when it took off, it has tripled in three years so in a five year period if my stock triples I am more than happy.

Sonia: The other stock that has taken off is Dish TV. About six months ago it was at Rs 55, then it went all the way to Rs 90 but now has come off in the last couple of weeks so would you still advise buying into the stock despite the run up?

A: Again Dish is a no-brainer and just one thing. When I invest or when anybody else wants to invest, the idea is not about 20-25 percent of returns and then moving out of that stock. I would ideally want to invest in a stock where in the next three years if I see the stock doubling I am more than happy. That is the kind of returns I am happy with.


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