Why Siddhartha Khemka likes L&T Finance, Byke Hospitality & Sanghvi Movers

In a chat with ET Now, Siddhartha Khemka, Centrum Broking, says expecting the markets to improve much better in the second half compared to the first half. Edited excerpts

ET Now: I cannot help but start the discussion with what has happened on some of the index names and the one that really takes the cake this week is Asian Paints. The volume growth numbers in double digit are really helping the stock on the day of the result. In today’s session at 9:44 it is trading at new 52-week highs for itself. What is happening here, it is not a cheap stock, it is an expensive stock, why are people still buying it?

Siddhartha Khemka: First of all let me tell you that in terms of SEBI guidelines, we are not ready with a view on the stock. However, having said that, you have seen in this quarter most of the paints companies have come out with good numbers, much better than expectations and this is one sector which has always been in the investors' interest and the quarters where they come out with good numbers. This year we are expecting a good monsoon and expecting the second half to be much better especially for consumer driven companies. The view obviously remains positive for the overall paint sector.

ET Now: The interesting one though is hospitality. Now I heard that amongst other things, they are also trying to get into a model which is similar to Oyo rooms or some of the others as well. How much of it is true? Also, why do you like Byke? when there is a Mahindra Holidays?

Siddhartha Khemka: Byke is a smallcap company in the hospitality sector. It focuses on niche mid-segment hospitality -- a hotel sector which purely focuses on the three star. What differentiates the company from other names that you have taken is that this company operates purely on an asset light model. As of now, it has nine properties, of which it owns only two and the rest others are on a operating lease basis. It has done well in FY11. The company saw a change in management where the new management came in and brought in a brand called the Byke. They have expanded the business from the two hotels that the company used to own to currently managing nine properties. Most of this apart from the initial two are on lease basis. Further, the company plans to increase the managed properties to 18 by FY18 and this is what gives it the growth that has been coming in the last two years and would continue to sustain on the topline side about 30 per cent further and on the bottom line side we expect about 38 per cent growth over the next two years. This asset light model helps the company to have a ROE of about 23-24 per cent which we expect to go up to 28 per cent by FY18. Given the cash flows that the company generates, it has a very asset light so balance sheet is relatively healthy with a debt to equity of less than 0.1 that separates it apart from the other hotel companies that we have seen where the ROEs are low, the balance sheet are streteched and still trading at a very high valuation. Compared to them Byke is currently trading at about 12.5 x on FY18. We see a room for this to go up and we value the stock at 18x on FY18 giving a target price of 225.

ET Now: Let us talk about your recommendations. Where do you have a view? L&T is there as part of the list, maintaining a buy, target at Rs 90. The numbers gave you more confidence about the outlook for the business?

Siddhartha Khemka: L&T Finance is one of our stocks which we have recommended with a buy rating. The company continues to do well. The Q4 numbers have come out where the overall NII has grown by 17-18 per cent which was mainly driven by more than 20 per cent growth in the loan book. What we have seen in the past, the company has consistently grown its loan book at more than 20-25 per cent which we expect to continue going forward next two years. On that AUM, the company enjoys healthy NIMs of 5.8 per cent with stable ROAs and ROEs. ROAs of about 1.5 per cent. ROEs are 14 % per cent and stock trading at about 1.7x FY18 book value where we see further upside of about 20 per cent from current levels.

ET Now: What else? There is L&T Finance, Byke Hospitality... Sanghvi Movers is a third one. Why do you like it?

Siddhartha Khemka: It is another mid to smallcap stock from our coverage where we have a positive view. The company provides large cranes for turnkey projects. The company has turned around in the last couple of years from losses to profits and has been continuously reporting improvement in its numbers. So, if you see the quarterly numbers, they are showing sharp growth in the top line as well as in the bottom line. What has happened in the last financial year FY16 is that the company went ahead and did another huge capex of almost Rs 500 crore to increase its fleet size which as of December stood at more than 400 and with the gross block of more than Rs 2000 crore. The company earns lease rentals out of these cranes and we have seen significant improvement in its margins from almost 60 per cent to 70 per cent, utilisation going up from 70% to more than 80%. The company is confident of maintaining high yields on these cranes as well as maintaining the utilisation at higher levels. The stock is currently trading at about three times FY18 EV EBITDA and we see upside to this and we value the stock at five times EV/EBITDA on FY18.

ET Now: I do not know what all do you have permission to speak about but we have spoken about the ideas as well. Anything else that stood out for you this week in terms of results or news flow?

Siddhartha Khemka: We have spoken about most of the companies. In terms of overall view on the market, we think that the market is likely to remain range-bound for some more time. The result season so far has been better than the expectation in a few companies where the overall view on the results were that it would remain weak. However, some of the results including some coming in the morning today positively surprised the market. So that would continue. The market would continue to see how the monsoon actually progresses because the data has said that monsoon would be better this time and apart from that the corporate earnings towards the later half of the year should do well and that is where we are expecting the markets to improve and investors should look at much better second half compared to the first half.