Religare has suggested 10 midcap stocks for investment. Religare believes that these shares have 35 – 50% upside by Dec-2011. The stocks selected by Religare are of fundamentally strong companies with a robust growth record.
The stock picks are designed to take advantage of India’s medium-term economic growth story which continues to remain healthy on account of a revival in demand. The current year looks particularly good given the better monsoon and its impact on rural demand.
Religare explains its choice of midcaps is because till September 29 this year, FIIs have invested about Rs 85,340 crore in the Indian markets, which is among the largest inflows in recent years, and a lot of foreign money has flowed into the largecap stocks. Therefore, midcaps have underperformed in the recent past. The BSE Midcap index has delivered only 6.14% returns in the last one month vis-a-vis the Sensex’s 10.8% returns.
Religare’s investment rationale for investment in the midcap shares is that on the back of a revival in the domestic economy and demand, the earnings of midcap companies are expected to grow about 25% over the next two years. Religare explains that considering that the valuations are at a discount and the earnings are expected to be strong over the next two years, investing in midcaps could be rewarding.
1) Ashok Leyland
Brief Description of Ashok Leyland
Ashok Leyland is the second-largest manufacturer of medium/heavy-duty vehicles in India. The products of Ashok Leyland include buses, trucks, engines, and defence and special vehicles. The product of Ashok Leyland also ranges from 7.5 ton to 49 ton in haulage vehicles. It also includes special application vehicles to diesel engines for industrial, marine and genset applications.
Investment Rationale for purchase of Ashok Leyland‘s shares
– As industrial and agriculture sectors post robust growth and the demand for commercial vehicles (CVs) moving in tandem. Ashok Leyland‘s market share increased to 27% in the June quarter compared to 17% a year ago.
– Commencement of Uttarakhand plant, strong traction in southern market, entry into newer segments and CV financing from Hinduja Leyland Finance are the major key drivers.
– On the back of the price hike in June, Ashok Leyland expects to maintain EBITDA margins in excess of 10%.
– Ashok Leyland is looking at a capex of around Rs. 2,000 crore in the next two years, which ncludes spends on joint ventures.
– Recently, Ashok Leyland has bagged an order for 2,850 buses from the Institute for Road ransport (IRT), the State Government agency for vehicle procurement in Tamil Nadu. The rder includes 150 vehicles conforming to BS IV emission norms for MTC (Metropolitan Transport Corporation, Chennai).
Risks of Ashok Leyland
Input costs are volatile and linked to global commodity prices for metals, plastics, etc. Volatility in interest rates and fuel prices could affect the demand of CVs. The new emission norms, effective October, may hurt sales during the quarter.
2) KEC International
Brief Description of KEC International
KEC International Limited is engaged in the engineering, procurement and construction (EPC) business executing power transmission, distribution, substations, railways and telecom projects and offering designing and engineering, tower testing, satellite and general packet radio service (GPRS) surveys and hotline stringing services. KEC International has global operations across 24 countries.
Investment Rationale for purchase of KEC International‘s shares
KEC International‘s order book and order inflows stood at Rs56.5 bn (1.5x FY10 cons. revenues) and Rs10 bn respectively in Q1 FY11. KEC International received several orders in its Railways and Cable segments.
KEC International recently acquired SAE Towers, for an enterprise value of $95 million.
The capacity utilization of SAE Towers is expected to increase from 60% to 100% in the next three to four years given the strong demand expected in American markets.
KEC International expects the cable business to break even on EBITDA level in FY11.
The cable business of KEC International expected to grow at a CAGR of 25% in the next two years on account of increasing in-house requirement for transmission and distribution businesses in the near term. In the medium term, KEC International is planning to enter into HV (220 KV+) cable EPC business and capture margin at cable EPC level too.
Risks of KEC International
Delays in order awarded by PGCIL and acquisition related risk.
3) Glenmark Pharmaceuticals
Brief Description of Glenmark Pharmaceuticals
Glenmark Pharmaceuticals Limited (GPL) is engaged in discovery of new molecules and is focused in the areas of inflammation, including asthma/ chronic obstructive pulmonary disease (COPD), and metabolic disorders. Glenmark Pharmaceuticals‘ API division has three products: perindopril, lercanidipine and topiramate. Its formulations business focuses on therapeutic areas, such as dermatology, anti-infectives, respiratory, cardiac, diabetes, gynecology, central nervous system (CNS), and oncology. The US market contributes around 26% to Glenmark Pharmaceuticals‘ revenue.
Investment Rationale for purchase of Glenmark Pharmaceuticals shares
Glenmark has developed a portfolio of low-competition niche generics in the last two years, which will drive growth in the near to medium term with larger stability.
After restructuring of product portfolio and operations in the Latin American business, Glenmark Pharmaceuticals has achieved 21% (annual) growth in branded formulations (in Brazil) and 10%growth in the oncology business. The geographical expansion in this market, other than Brazil and Argentina, is one of the main contributors to growth.
As Glenmark Pharmaceuticals has been getting a slew of approvals in the US the volumes likely to improve.
Glenmark Pharmaceuticals expected to achieve better growth in domestic formulations market on the back of its prominent brands in dermatology, cardiology and respiratory segments.
Risks of Glenmark Pharmaceuticals
Unexpected pricing pressure in the US market.
Unfavourable developments on the Sanofi and Merck deal.
4) Educomp Solutions
Brief Description of Educomp Solutions
Educomp Solutions operates in four segments: Professional Development, Smart Class, Edureach, and Retail and consulting. Educomp Solutions works with schools implementing models, creating and delivering content to enhance student learning. Educomp Solutions‘ products include Smart class, a teacher-led content delivery system; Roots to Wings, a pre-school learning system, and Mathguru.com, an online learning initiative. Educomp Solutions has developed three dimensional (3D) kindergartens through twelfth grade (K-12) content library with approximately 16,000 modules.
Investment Rationale for purchase of Educomp Solutions shares
Educomp Solutions is well placed to take advantage of the new opportunities in the education sector which expected to grow at US$45bn in 2015.
K-12 lays the base for Educomp Solutions‘ future expansion into the vocational/ higher education space. Educomp Solutions aims to increase K-12 schools to 69 by this year end from the current 43.
Educomp Solutions has picked up a majority stake in Delhi-based engineering test preparation company Vidya Mandir Classes for about Rs 34 crore.
Risks of investment in Educomp Solutions
Changes in regulations in K-12 segment.
Risk of execution slippages as management bandwidth is stretched over multiple business lines.
5) Petronet LNG
Brief Description of Petronet LNG
Petronet LNG Limited is engaged in the import and regasification of liquefied natural gas (LNG).
Petronet LNG has an operating terminal located at Dahej, Gujarat. Petronet LNG was formed as a joint venture by the Government of India to import LNG and set up LNG terminals in the country.
The promoters of Petronet LNG include GAIL (India) Limited (GAIL), Oil & Natural Gas Corporation Limited (ONGC), Indian Oil Corporation Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL).
Investment Rationale for purchase of Petronet LNG‘s shares
Petronet LNG’s revenues are sourced from regasification of LNG through long-term contracts and spot deals. It has 10 million tonnes per annum (mtpa) capacity at Dahej, and is building the Kochi terminal. Petronet LNG has already tied up for nine mtpa long term contracts. It has signed back-to-back contracts with off-takers. Therefore, Petronet LNG does not bear any price or volume risk associated with long-term contracts and has created a natural hedge.
Petronet LNG has plans to invest around Rs. 5200 crore till FY14 and expand capacity to 18 mtpa. The next level of triggers will be in the form of earnings visibility from the spot volumes and the regasification margins that bring in the cash.
Risks of Petronet LNG
Issue of pricing and pipeline connectivity could hamper growth of the LNG business of Petronet LNG.
Reliance Gas Transportation Infrastructure Ltd (RGTIL) increasing its reach in the southern market.
6) Sintex Industries
Brief Description of Sintex Industries
Sintex Industries Ltd. (SIL) is one of the leading providers of plastics and niche textile-related products in the country. In the plastics division, Sintex Industries manufactures storage solutions for water, oil and fuel; prefabricated structures, monolithic structures, custom moulded products and composites. These are high-end plastic products that are used mainly in automobiles, electricals, construction and telecom industries. In the textile division, Sintex Industries manufactures high-value, yarn-dyed structured fabrics, corduroy and items relating to home textiles.
Investment Rationale for purchase of Sintex Industries‘ shares
Sintex had acquired six companies over the past couple of years – two in the US, one in
France and three in India and is looking out for more. Its strong thrust for inorganic growth and innovative product offering makes Sintex Industries more attractive.
Sintex Industries‘ pre-fabricated building materials and monolithic construction material are in great demand in low-cost housing projects, rural schools and healthcare shelters.
Recovery in the automobiles sector and the housing sector coupled with further moderation in input costs will be the next trigger.
Risks of Sintex Industries
PVC resins, plastic granules and powder are the major raw materials for the plastics division and they make up over 74% of the total production costs. The prices of these materials closely follow the crude oil. Therefore, rise in crude prices could increase the margin pressure.
7) Sobha Developers
Brief Description of Sobha Developers
Sobha Developers Limited (SDL) is a real estate company with a focus on residential and commercial development. Sobha Developers‘ projects are primarily located in Bangalore and Coimbatore. As of March 31, 2010, Sobha Developers has developed and constructed 47 residential projects in Bangalore and Coimbatore aggregating 5544 units and covering 12.44 million square feet of super built up area. Sobha Developers has completed a total of 13 commercial projects measuring 1.85 million square feet of super built up area.
Investment Rationale for purchase of Sobha Developers‘ shares
Demand for residential property is sound and is expected to see an upward trend in the
medium term. Sobha Developers plans to launch about 12 million square feet of residential projects this fiscal year and has implemented selective price increases. Sobha Developers hopes to sell about 3 million in the year to March 2011.
Sobha Developers is likely to see an increase in RoNW from 9.6% in FY10 to 17.9% by FY13E as growth would be aided by Sobha Developers‘ entry into new geographies and sustained volumes from the home markets.
Risks of Sobha Developers
Low response from the home markets could affect the liquidity position.
8 ) Mahindra & Mahindra Financial Services Ltd
Brief Description of Mahindra & Mahindra Financial Services
Mahindra & Mahindra Financial Services Limited (MMFSL) is a non-banking finance company and a subsidiary of Mahindra & Mahindra Limited (M&M). Mahindra & Mahindra Financial Services (MMFSL) provides loans for utility vehicles, tractors, cars, two-wheelers, three wheelers, commercial vehicles as well as construction
Investment Rationale for purchase of Mahindra & Mahindra Financial Services (MMFSL)’ shares
A revival in the auto market has helped Mahindra & Mahindra Financial Services (MMFSL) to push its products vigorously. Mahindra & Mahindra Financial Services (MMFSL) may continue this momentum as the automobile sector continues to grow at a strong pace.
Mahindra & Mahindra Financial Services (MMFSL) is focusing more on rural markets to expand the business. With rural market growing at 30-35% and with liquidity in the hands of the farmers Mahindra & Mahindra Financial Services (MMFSL) is eyeing a big market to tap.
Rural incomes, too, are expected to remain high because of the various government schemes in semi-urban and rural areas.
Net spreads of Mahindra & Mahindra Financial Services (MMFSL) are likely to improve as provisions fall.
Risks of Mahindra & Mahindra Financial Services (MMFSL)
Any rise in interest rates may lead to higher slippages for Mahindra & Mahindra Financial Services (MMFSL) which may put pressure on the spreads.
9) Shree Cement
Brief Description of Shree Cement
Shree Cement Limited operates in two segments: cement and power. Shree Cement ‘s product brands include Shree Ultra, Bangur and Rockstrong and sells primarly in Northern India.
Investment Rationale for purchase of Shree Cement‘s shares
The present cement capacity of Shree Cement stands at 12 mpta and its power plant capacity is 210 MW. Shree Cement is setting up new cement and power plants in Karnataka, Chhattisgarh and Rajasthan.
The North Indian market is witnessing a 10% annual growth in consumption of key building material and Shree Cement expects that the market to be strong over the medium term.
Risks of Shree Cement
Margins could be affected if cement prices fall.
Shree Cement has not witnessed a strong demand of the product.
Brief Description of Voltas
Voltas Limited is a provider of integrated end-to-end solutions in electro-mechanicals and refrigeration. Voltas has three segments: electro-mechanical projects and services, engineering products and services, and unitary cooling products for comfort and commercial use.
Investment Rationale for purchase of Voltas‘ shares
Electromechanical Projects is the core business and contributes 65% of the annual turnover. Around 70% of the segment turnover comes from Middle East. Voltas has initiated aggressive steps to undertake more electro-mechanical projects in the industrial and infrastructure segments. Voltas has formed JV with a local Saudi Arabian company for MEP projects in the country. This is likely to lead to a breakthrough for Voltas in the Saudi Arabian market.
Engineering products business segment are on a recovery path following previous year’s severe demand downturn and hence are not at their potential growth rates.
The unitary cooling products (UCP) business, which contributes 42% of total revenues (June quarter) and has being mainly driven by the Split Air Conditioners and commercial coolers. Voltas has been consolidating its market share in the room AC business.
Risks of Voltas
Recovery in Middle East market is at its nascent stage.
Lower than expected volume growth.