Four Top-Quality Mid-Cap Stock Picks With Up To 35% Upside By Amar Ambani Of IIFL

Suprajit Engineering Ltd: Cabled for growth on a well lit road – BUY
CMP: ₹133, 1-yr Target: ₹180, Upside: 35.8%

Multiple triggers for revenue growth
Suprajit Engineering, a global leader in automotive cables, is well poised to witness industry beating revenue CAGR of 29% during FY15-18E driven by growth across segments.

• Two wheeler OEMs – growth from existing customers in line with industry growth of 8-10%, higher growth from HMSI as share of business increases from ~30% currently to about 50% in the next few years
• Passenger car OEMs – only 30% market share as no major presence with Maruti Suzuki, which is set to change as inroads have been made through acquisition of cables division of Pricol, Superior experience of HMSI for two wheelers can extend to Honda cars as well
• Exports – large potential exists, Suprajit has set up a branch in Atlanta, USA to gain traction in that market, ramp up of business from existing customers will happen driven by high quality levels of Suprajit cables
• Replacement market – currently dominated by unorganised players, however post implementation of GST, Suprajit with quality product at competitive prices and established brand should see strong traction
• Phoenix Lamps – Recently acquired by Suprajit, we see strong revival in its business through synergy benefits, increasing proportion of LED lights to improve topline growth as well as profitability

Strong earnings growth expected
Backed by strong revenue growth, we see benefits of operating leverage kicking in for standalone operations as well as Phoenix Lamps. Benign commodity prices will further boost margins. Overall we expect margins to expand 107bps during FY15-18E. This will translate into earnings CAGR of 34% during FY15-18E.

Premium valuations justified, Initiate with a BUY
Suprajit is extending its leadership position in the cables business and with Phoenix acquisition will have leadership position in lighting business. Along with a strong balance sheet, healthy return ratios and high earnings CAGR, we find the valuations of 13x FY18E P/E justified. Initiate coverage with a BUY recommendation with a 1-year target of ₹180.

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ITD Cementation India Ltd: Turnaround story; strong bet on construction play – BUY
CMP: ₹101, 1-yr Target: ₹134, Upside: 33%

ITD Cementation (ITDC), an eight decade old company has built strong expertise in marine, urban infra and other infrastructure segments and is one of the few EPC players owned by a construction MNC. The strong parentage provides comfort with regards to execution (achieving pre-qualification, technology transfer from parent etc), while ensuring transparency in operations. Mumbai-based ITDC has always focused on the asset light EPC space and never ventured into BOT. Diversifying into multiple segments provides ITDC an edge over peers in terms of achieving regular EPC order inflows. It was therefore able to refrain from bidding for BOT projects. This proved beneficial from ITDC’s perspective, as many EPC players had ventured into the BOT space during last few years to secure orders only to later switch back to EPC after a bitter experience. ITDC intends to continue with its EPC focused strategy, which we believe would prove beneficial from a long-term perspective. ITDC currently sits on an order book of ~₹5,200cr (excludes strong L1 position of ~₹3,500cr). ITDC expects conversion of L1 projects soon, which would further augment its position. ITDC did experience pressures over the past few years as certain receivables were stuck in litigation. However, recent settlement from NHAI (major portion) provided a strong boost. Additionally, ITDC raised ₹140cr via QIP during 2014 to bolster its balance sheet. ITDC does not intend to bid for NHAI orders till it is certain of payment not being an issue. It would focus on state government and private sector for road projects.

Backed by larger size of operations (~2x FY14 topline), execution of certain high-margin orders and diminished concerns on receivables, we expect ITDC to have an operating profit growth of whopping 42% CAGR over CY15-17E, with margins reaching ~10% (~6% currently) by CY17E. With an improving operating performance and comfortable balance sheet position, ROE is likely to spike to more than 20% by CY17E, higher than most other EPC players. Despite strong growth prospects, the scrip is trading at 10.6x its CY17E EPS. We believe re-rating is on the cards for ITDC, which we expect to be one of the best bets in the construction space. We recommend BUY for a target price of ₹134, implying a target P/E of 14x.

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Techno Electric & Engg Co: Engineered for superior growth – BUY
CMP: ₹457, 1-yr Target: ₹607, Upside: 32.8%

We initiate coverage on Techno Electric and Engineering Co (TEEC), a niche player in the power transmission and distribution (T&D) space. We expect TEEC to benefit from strong capex in the T&D space over the next three years. TEEC’s return ratios and margins have outperformed the industry, driven by superior execution skills, cherry picking of orders, and an asset light model. Considering the strong order book, huge ordering pipeline, and high capex spend in Northeast India, we estimate 28% revenue CAGR over FY15-18. The company has initiated the process of selling its wind assets, which would reduce the overhang of lower RoCE. Investments in transmission BOOT/BOOM projects would provide fixed returns and improve revenue visibility. We value the EPC business at 16x FY18E EPS, which is at a premium compared with peers, backed by a strong order book and above-industry margins and return ratios. Based on SOTP methodology, we arrive at a fair value of ₹607, which implies 32.8% upside from the current level. Recommend BUY.

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Tech Mahindra Ltd. – BUY
CMP: ₹463, 3-m Target: ₹528, Upside: 14%

• Revenue growth to start improving from H2 FY17
• Operating margin could bounce from current levels
• Earnings growth to improve; valuation at trough

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