IIFL has highlighted eight bottom-up stock ideas with a strong thematic opportunity, on the basis of its exploratory study on the BSE-500 stocks that suggest serious value in successful mid-cap stock-picking. All of IIFL’s recommended companies in have the following factors in common:
– They represent a thematic opportunity that is sizable, and within that space, they have a dominant and profitable presence.
– They do not have stretched balance-sheets that are vulnerable to a liquidity squeeze.
– The manufacturing companies have significant pricing power to manage demand profitably in an inflationary environment.
– These are well-managed companies with the management bandwidth to make the most of the opportunity.
Amara Raja: Amara Raja Batteries Ltd is the second-largest manufacturer of lead-acid batteries in India, with ~23% share by volume of the organised battery market. Amara Raja Batteries is estimated to show earnings CAGR of ~30% over the next two years, driven by capacity expansion in the automotive and two-wheeler segments. Concerns over Amara Raja Batteries‘ high exposure to the telecom sector are overdone, and ignore the company’s strong performance in the automotive and UPS segments. On the telecom side too, there are initial signs of bottoming; Amara Raja Batteries can be expected to show substantial improvement in this segment’s revenues and margins in FY12. Valuations, at 9x FY12ii EPS, are attractive for a branded consumer company.
|Mid-Cap Stock||CMP||12 Month Upside||Mkt Cap (US$ M)||P/E (x) (FY 12)||EPS CAGR FY10-13||EV/ EBITDA(x) FY 12||P/B (x) FY 12||ROE (%) FY 12|
|Amara Raja Batteries||171||64%||323||9.0||6.0||5.1||1.9||20.6|
Bajaj Electricals: Bajaj Electricals is a leading player in consumer appliances, fans and lighting products, which together account for 55% of its revenues. Bajaj Electricals enjoys an established brand franchise in India, with a market share of 20-30% in most of the consumer-durable categories in which it operates. Bajaj Electricals is well-placed to benefit from the potential 25%+ volume growth in consumer durables, driven by underpenetrated semi-urban markets. With the government’s focus on rural infrastructure also remaining high, growth in sales of Bajaj Electricals‘ industrial products too should stay high at over 20%+ annually. The stock is trading at 11.5x FY12ii EPS. The 1-year forward multiple should re-rate to 14x, given Bajaj Electricals’ leadership position in a fast-growing market.
Bajaj Finance: Bajaj Finance is a play on the consumer and small business lending opportunities in India. Positioned initially as a consumer finance company, Bajaj Finance expanded its scope to include opportunities in small businesses as well. Bajaj Finance’s competitive advantage includes strong parentage, favourable funding position, and an experienced senior management team. High asset growth, improving efficiency and a renewed focus on asset quality would drive 70% CAGR in earnings during FY10-13ii. Strong and sustainable earnings growth, rising ROE and an inexpensive valuation (P/B of 1.6x on FY12ii) makes Bajaj Finance an attractive play.
Emami: Emami is one of India’s fastest growing FMCG companies, with a unique product mix of leadership positions in niche segments such as ‘cooling oils’, pain balms and antiseptic creams. With minimal competition from large companies, Emami commands high pricing power, which would help it tide over commodity inflation. Growth in low-penetration core categories, product innovation and expansion in the international business will drive 24% earnings CAGR over FY10-13. Margin pressures and an expensive bid for Paras Pharmaceuticals have led to a correction of 24% in the past six months, which is an attractive entry point into the stock.
Havells India: Electrical consumer-goods major Havells is a beneficiary of robust demand growth based on upgrading consumer preferences and increased construction activity in its key verticals—switchgears, lighting fixtures, consumer durables (fans) and cables/wires. Strong brands built through aggressive advertising strategy and extensive distribution networks are sustainable growth drivers for Havells India. Consolidated leverage is set to decline, with its European lighting-fixtures acquisition Sylvania looking to breakeven in FY12, post restructuring. The stock’s current P/E of 11.8 on FY12ii is reasonable.
HT Media: HT Media, a leading print media conglomerate, boasts of a strong product portfolio catering to the lucrative English and Hindi print markets. Well-entrenched leadership of its flagship dailies, Hindustan Times in English and Hindustan in Hindi in their respective legacy markets would enable it to capitalise on ad-spend strength. In the new markets, namely Hindustan Times in Mumbai and Hindustan in Uttar Pradesh HT Media‘s ad revenues to surge, as its readership market share is nearing inflection. Having made peak investments in these markets, a strong operating leverage would come into play, leading to 34% earnings CAGR over FY11-13ii for HT Media.
Indraprastha Gas: Indraprastha Gas, the sole distributor of gas in the National Capital Region (NCR), has extensive network penetration. This will enable Indraprastha Gas to maintain its monopoly in Delhi and pass on any increase in input prices, as reflected in the 32% increase in CNG prices since June 2010. Indraprastha Gas plans to replicate its network in markets adjoining Delhi—Noida, Greater Noida and Ghaziabad—where demand for gas remains strong. This will translate into a volume CAGR of 23% and earnings CAGR of 18% over FY11-13ii for Indraprastha Gas. Trading at 15x FY12ii EPS, Indraprastha Gas offers a quality play on gas retailing in India.
Pidilite: Pidilite Industries is a niche consumer and specialty chemicals player in India. Pidilite has pioneered multiple brands of national top-of-the-mind recall like Fevicol and M-Seal. Construction chemicals (primarily retail consumption) is Pidilite’s new growth driver, as legacy strengths remain in place for now mature categories like adhesives and sealants. This should drive ~16% revenue CAGR leading to 20.3% EPS CAGR over FY10- 13ii. Pidilite‘s stock is valued at 17.9x FY12ii P/E.