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Catch 'em Young

Dipak Mondal/Money Today | Print Edition: September 2011

At a time when the global equity markets are overcast with fears of a double dip recession, to even talk about investing in stocks can be considered a cardinal sin. But as a personal finance magazine, we have always maintained that one should invest for a long term in select stocks in a staggered manner without getting swayed by short or medium-term negative sentiments.

In the second part of our series on Mid-cap Bets, we bring to you from the mid-cap space 10 more stocks, which have the potential to grow into large-cap companies in the next 5-10 years, given the opportunities in their respective sectors, order flows and strong balance sheets.

The stocks were selected from a list of 35-40 stocks picked by different broking companies-Bajaj Capital, Kotak Securities, Aditya Birla Money, Angel Broking, Bonanza Portfolio and Edelweiss Securities.

SPECIAL:Why mid-cap funds continue to fare better

While selecting the 10 stocks, we considered parameters such as sectoral advantage, top line and bottom line performances over the past 4-5 years, immediate policy boost, balance sheets and financial ratios like debt-equity ratio, return on equity (RoE) and price-earning multiples.

CHAMBAL FERTILISERS

Chambal Fertilisers is one of the large private sector fertiliser companies in India. It makes nitrogenous fertiliser (urea) in two plants in Kota, Rajasthan. It has subsidiaries in agriculture products, shipping, textile and software sectors.

The company is set to gain from two policy measures in the fertiliser space-partial decontrol of urea prices under the nutrient-based subsidy scheme and buying back of fertiliser bonds by the government.

Urea is the only fertiliser that is under full government control. Recently, a group of ministers has approved partial decontrol of urea.

There is also a buzz in the market that the government will buy back fertiliser bonds worth Rs 7,000 crore at a discount and compensate fertiliser firms with 50 per cent of the losses incurred by them due to selling at subsidised prices. The company will also gain from high urea prices and the demerger of the shipping division, which the management believes is hurting growth.

Performance and valuation: The company's revenue grew 30 per cent to Rs 4,680 crore in 2010-11 from Rs 3,600 crore in the previous year. Net profit grew 14 per cent. In the first quarter of 2011-12, revenue grew 20 per cent to Rs 1,164. However, net profit declined 9 per cent to Rs 73 crore on poor performance by the textile division.

The stock rose 38 per cent from Rs 68 on August 10, 2010, to Rs 93 on August 1, 2011. It is trading around 10 times 2011-12 and 8 times 2012-13 forward earnings. Given the positive triggers, it looks a good long-term buy.

ELECON ENGINEERING

The 60-year old company is a pioneer in manufacturing material handling equipment such as elevators and conveyors. It has also diversified into manufacturing of gear boxes. Elecon is one of Asia's largest gear manufacturing company with presence also in Australia, Africa and Europe.

From Rs 507 crore in March 2006, the company's revenue grew at a 19 per cent CAGR to Rs 1,173 crore by the end of March 2011.

Expert view
A healthy order book at the end of the June 2011 quarter and strong order inflows are expected to support the company for a long time. At the end of June 2011, the company's order book was Rs 1,600 crore. It got orders worth Rs 320 crore during the year.

The company has estimated 25 per cent growth in revenue to Rs 1,450-1,500 crore in 2011-12 on the back of strong order book and satisfactory progress in order execution. The management expects orders worth Rs 1,500-1,700 crore in the current financial year.

Performance and valuation: Elecon Engineering reported a 12.5 per cent increase in revenue to Rs 1,173 crore and a 32 per cent rise in net profit in 2010-11.

Brokerage houses have estimated 16-21 per cent growth in revenue till 2012-13.

In the one-year period ended August 9, 2011, the share price of the company fell 17 per cent from Rs 88.5 to Rs 73.4. At the August 9, 2011 price of Rs 73 a share, the stock was trading at 8-9 times forward earnings for 2011-12 and 2012-13.

GLENMARK PHARMA

The company makes branded and generic drugs with the former accounting for 60 per cent revenue in the June 2011 quarter. The domestic and the US markets accounted for 55 per cent sales.

In the first quarter of 2011-12, it got approval for manufacturing four generic drugs from regulators in the US, and had sought approval for four more generic drugs.

Expert view
In the second quarter, it plans to file for four products and expects to launch seven products. The company's five chemical and biological molecules are in different phases of trials.

"When most Indian companies are shifting to generics, Glenmark has been focused on research and development (R&D) for developing new molecules," says Vinesh Menon, deputy CEO, online investments and stock broking, Bajaj Capital.

Performance and valuation: The company's revenue grew 28 per cent to Rs 868 crore in the first quarter of 2011-12. Net profit rose 23 per cent from Rs 171 crore in April-June 2010 to Rs 210 crore in the corresponding period this year.

The stock rose 14 per cent from Rs 268 on August 10, 2011 to Rs 306 on August 9, 2011. Nifty rose -7.1 per cent during the period.

At 13 times 2011-12 and 14 times 2012-13 forward earnings, the stock is available at fair value.

GUJARAT PIPAVAV

The country's first private sector port is promoted by APM Terminal, one of the biggest port operators in the world. The company, which got listed in September 2010, has exclusive rights to develop and handle the Pipavav port till 2028.

The port's location on the west coast gives it an edge. This makes it a natural choice for vessels coming from and going to West Asia, Africa and other important international destinations. Given the congestion at the Jawaharlal Nehru Port Trust in Mumbai, it is well positioned to attract more traffic.

According to CRISIL Research, container traffic at non-major ports is expected to grow at a CAGR of 26.4 per cent from 13 million tonnes in 2008-09 to 43 million tonnes in 2013-14. "The container market of north and north-western India is expected to grow at a CAGR of 11-12 per cent in the next 3 to 4 years."

Performance and valuation: The company reported a 30 per cent increase in revenue in 2010 to Rs 284 crore, though it posted a loss of Rs 50.9 crore.

According to an estimate by brokerage house Prabhudas Liladhar, the company's revenue may increase by 40 per cent to Rs 400 crore.

The share price of the company has risen 25 per cent from Rs 54 on September 9, 2010 to Rs 67 August 9, 2011.

IRB INFRASTRUCTURE

The company is a major player in the road sector. It works on the build-operate-transfer model and has built 2,000 km roads so far.

IRB has shown good project execution skills. It has completed 15 road projects since 1994 and is working on four. It recently bagged the project for six-laning the Ahmedabad-Vadodara section of National Highway-8 (102 km) and improvement of the Ahmedabad-Vadodara Expressway (93km).

The company has an order book of Rs 11,171 crore. It has bid for the Rs 2,970 crore, 330-km Shivpuri-Dewas four-laning project on National Highway-3 in Madhya Pradesh. IRB, along with partner Reliance Infrastructure, is also pre-qualified to bid for the Rs 5,390-crore Kishangarh-Ahmedabad six-laning project.

The company is planning to raise up to Rs 1,200 crore through preferential share issue and private placements.

Though the company's debt doubled in 2010-11, the debt-to-equity ratio was a comfortable 0.88 at the end of the last financial year.

Performance and valuation: After ending 2010-11 with a 43 per cent increase in revenue to Rs 2,438 crore, the company posted strong revenue growth in the first quarter of 2011-12. Net revenue grew 56.5 per cent to Rs 801 crore and net profit jumped 14.5 per cent to Rs 134 in the June quarter of the current financial year.

The stock fell 46 per cent from Rs 292 on August 10, 2010 to Rs 156 on August 9, 2011. At present, it is trading at 10-11 times estimated earnings for 2011-12 and 2012-13.

"The stock looks attractive given the recent steep correction and improved outlook on NHAI's (National Highway Authority of India's) project award activity," says a report from Sharekhan.

NIIT TECHNOLOGIES

NIIT Technologies is an information technology (IT) solution provider. It offers application development and management, managed services, cloud computing and business process outsourcing services.

NIIT Tech's sales grew from Rs 607 crore at the end of 2005-06 to Rs 1,232 crore in March 2011, a compounded annual growth rate of 15 per cent. It is likely to maintain this rate for the next couple of years with estimated revenue of Rs 1,437 crore in 2011-12 and Rs 1,692 crore in 2012-13.

NIIT has a strong order book. It reported new orders worth Rs 380 crore in the June quarter, taking the total to Rs 900 crore, to be executed over the next 12 months. The company entered into a joint venture with Morris Communication for IT and BPO services. The venture will ensure orders worth Rs 370-380 crore over the next five years. The company will invest $3.2 million (Rs 14.4 crore) to own 60 per cent in the venture.

"The company was ranked number one globally among IT outsourcers in a travel industry survey. It has major airlines such as British Airways, Cathay Pacific and Emirates as clients. It is focused on core competence and has grown exceedingly well," says K Jayaraman, research associate, Bonanza Portfolio.

Performance and valuation: Revenue grew 33 per cent to Rs 329 crore in the June quarter compared to Rs 247 crore in the corresponding period previous year. On a sequential basis, the growth was 4.1 per cent. Net profit grew 4.2 per cent to Rs 41.2 crore year-on-year but fell 18 per cent compared with the previous quarter due to higher employee costs.

The share price rose 11.5 per cent from Rs 181 on August 10, 2010, to Rs 202 on August 9, 2011. The stock trades at six times 2011-12 and 2012-13 forward earnings.

ORCHID CHEMICALS

Orchid Chemicals is engaged in the whole range of activities in the pharmaceutical business right from discovering a drug to its delivery. It has five manufacturing units in India and one in China, besides two R&D units in Chennai. It is present in more than 70 countries.

Orchid Chemicals has sought approval for manufacturing 42 generic drugs from the US Food and Drug Administration. Eight of these are first-to-file (FTF) applications. An FTF approval allows a patent challenger six months to exclusively sell generics after the patent held by the innovator company expires.

The company also has an exclusive 10-year supply agreement for API with Hospira for the acquired generic injectable business.

The company reduced operating costs in 2010-11. According to its annual report released in March 2011, operating costs fell 14 per cent to Rs 1,253 crore in 2010-11 from Rs 1,422 crore in 2009-10. It managed to bring down its debt to equity ratio to 1.6 in 2010-11 from 4.3 at the end of 2008-09.

Performance and valuation: After a strong performance in 2010-11, when it reported sales growth of 37 per cent, the company posted a 23 per cent increase in revenue to Rs 374 crore in first quarter of 2011-12 compared to Rs 303 crore in the corresponding period of the previous year.

The share price of the company dropped 10.5 per cent from Rs 196 on August 10, 2010, to Rs 175 on August 9, 2011. Trading at 7.5 times 2011-12 and 5.6 times 2012-13 estimated earnings, the stock looks an attractive buy.

TECH MAHINDRA

Tech Mahindra, a joint venture between Mahindra Group and British Telecom, is an IT and BPO company with focus on telecommunications. It acquired Satyam Computers (now called Mahindra Satyam) in 2009.

It sees a huge opportunity in emerging markets due to new spectrum licensing, increase in broadband penetration and growth in demand for value-added services.

"Tech Mahindra has de-risked their dependency on British Telecom and is now spread across verticals like financial services and engineering," says Vinesh Menon of Bajaj Capital.

Tech Mahindra has got a five-year contract from a leading mobile service provider in Australia. It will be a strategic partner responsible for consolidating and managing the entire systems stack and associated services. It has also been selected by a leading West Asian service provider for transforming the legacy platform.

Tech Mahindra, through subsidiary Canvas M, will roll out 2G/3G devices for a US telecom company.

Performance and valuations: For the year ended March 31, 2011, total income rose to Rs 5,257 crore against Rs 4,700 crore previous year.

The share price rose from Rs 715 on August 10, 2010 to Rs 728 on August 9, 2011. The share is trading at 14 times estimated earnings for 2011-12 and 2012-13, the cheapest among major IT stocks.

However, a gloomy economic outlook in the US and Europe combined with the movement of the rupee against the dollar remain a major worry.

TIME TECHNOPLAST

Time Technoplast is a polymer company with a portfolio that includes industrial packaging products, lifestyle products, automotive components and construction material. It has over 40 production units across the globe.

It has operations in India, the UAE, Bahrain, Thailand, Poland, Egypt, Taiwan and China, among others. In 2010, it bought companies in the Czech Republic, Romania and Taiwan and set up units in South Korea and China. In India, it set up a unit in Tamil Nadu and diversified into waste management.

All these "organic and inorganic initiatives taken in 2010-11 will yield results in 2011-12 and beyond," said a Motilal Oswal report.

The company's consolidated revenue grew from Rs 682 crore at the end of 2007-08 to Rs 1,275 crore in 2010-11, a CAGR of 17 per cent. In 2011-12, the revenue is estimated to grow 20-25 per cent.

Performance and valuation: In 2010-11 the company posted 26 per cent growth in revenue to Rs 1,275 crore compared to Rs 1,011 crore in the previous financial year. Net profit rose from Rs 91 crore in 2009-10 to Rs 108 crore in 2010-11, a growth rate of 18 per cent.

The share price of the company rose 16 per cent from Rs 56 on August 10, 2010, to Rs 65 on August 9, 2011, compared to a 7.1 per cent drop in the Nifty.

At the August 1, 2011, price of Rs 70, the stock is trading just over five times estimated earnings in 2011-12.

YES BANK

The country's youngest private sector bank has shown strong growth since it was set up in 2004. Its revenue rose nearly five-fold from Rs 788 crore in the year ended March 2007 to Rs 4,665 crore in the year ended March 2011.

The bank, which had Rs 43,580 crore deposits and Rs 33,100 crore in advances on June 30, 2011, is targeting Rs 1.25 lakh crore deposits and Rs 1 lakh crore advances by 2015.

Expert view
It is aiming for a current account saving account, or CASA, ratio of 30 per cent, as against 10.9 per cent on June 30, 2011. Among industry peers, CASA deposits account for 49 per cent of HDFC Bank's total deposits and 41 per cent for ICICI Bank. A higher CASA ratio is a good indicator of a bank's health as the interest paid on these deposits is low.

Performance and valuation: Yes Bank posted a net profit of Rs 216 crore in the April-June quarter, an increase of 38 per cent over the corresponding quarter of the previous year. The revenue grew 77 per cent to Rs 1,564 crore.

In the one-year period ended August 9, 2011, the stock gave a return of 3.71 per cent -- it rose from Rs 292 on August 10, 2010, to Rs 303 on August 1, 2011 - compared to Nifty's -7.1 per cent return (5460 on August 10, 2010 to 5072 on August 9, 2011) during the period.

The stock is trading at 12-13 times 2011-12 and 9-10 times 2012-13 estimated earnings.

"This bank will outperform the industry due to its aggressive development plans and focus on the verticals with higher productivity and opportunities," says K Jayaraman, research associate, Bonanza Portfolio.

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