Bhavin Shah is the CEO of Equirus Securities. His first stock pick is his old favourite Amara Raja Batteries, which also found a place in the 2012 stock picks and delivered excellent returns of 147%. It also finds pride of place in Rakesh Jhunjhunwala Model Portfolio 2013.
Bhavin Shah emphasized that despite the huge gains that Amara Raja had delivered after his 2012 recommendation, there is still a lot of juice left in it for latecomers. He explained that there is a fundamental valuation difference of nearly 30 to 35% between Exide Industries and Amara Raja even though both companies cater to the same market. He pointed out that while Exide is the number one player, its business strategy of backward integration had not fared well and had brought in more volatility to its earnings. The backward integration appeared to be positive for margins, but had increased the volatility of the business and had given rise to Exide’s choppy earnings.
Amara Raja, on the other hand, has steadily improved its industry standing, its’ brand position and its return on capital and as a result the discount to Exide has narrowed. There is scope for even that discount to be narrowed, Bhavin Shah said.
Bhavin Shah’s optimism for Amara Raja stemmed from the fact that there was a very strong vehicle growth in the second half of FY10 and there is going to be some surge in replacement demand for batteries as the expected life comes to a round two-three years. The entire Industry would see volume growth and there were relatively better prospects for Amara Raja, Bhavin Shah said.
Bhavin Shah’s second stock pick is Torrent Power, which has been bludgeoned out of shape in the recent past owing to the non-availability of gas on which it is heavily dependent.
Bhavin Shah expressed confidence that the issues of gas would be sorted out soon, perhaps even by the import of gas from the USA where there was a glut. The import of gas from the USA was feasible given the kind of tariff increases that one can see across the country, he said.
He also expressed hope that because Torrent Power was doubling its power generation capacity over the next two-three years, the share price could move up substantially.
Bhavin Shah’s third stock pick is Petronet LNG. He liked the stock because it is the primary mechanism to bring the imported gas to various Indian companies. With starting of production at Kochi terminal it will also contribute to higher growth rate, he said.
Persistent Systems was Bhavin Shah’s fourth stock pick. He said he liked Persistent Systems because it embraces new technologies of cloud computing and has based its business model around these new technologies. Persistent Systems has also been working hard to create revenues in their portfolio and it has the potential to deliver 25-30 percent earnings growth in FY14, he said. Persistent Systems is quoting at a reasonable valuation and there is a 25 percent plus share price upside from this level, Bhavin Shah said with confidence.
Sadbhav Engineering also found its way in Bhavin Shah’s stock picks. The reason he likes the stock is because it is a very conservative company and bids very cautiously after looking at the internal rate of return (IRR) of the projects. Bhavin Shah pointed out that Sadbhav Engineering’s operating cash flow would improve significantly as quite a few of its Build Operate & Transfer (BOT) projects would become operational in the next 12 months.
So, there you have it. Bhavin Shah’s five top-quality midcap stock picks for 2013. Each one of them is a strong story and should be able to perform well in the medium to long term.