Six Top-Quality Mid-Cap Stocks To Buy Now: Credit Suisse

ET has reported that Credit Suisse has identified six stocks with decent fundamentals that have corrected somewhat recently. The stocks have been selected with a threshold ROE and P/E multiple.

The stocks which are short-listed are the following:

Apollo Tyres Ltd: Target price Rs 266 :

Apollo has witnessed a 700 bps gross margin expansion (for the standalone business) in the past two years, primarily driven by lower rubber prices, which constitute 40% of input cost and has been declining since FY12.

Going forward, Credit Suisse expects more gains (100 bps in FY16), given the fall in crude prices, which constitute a bulk of remaining raw material prices. So far this cycle has seen remarkable pricing discipline in the industry with very negligible price cuts and that too in just truck bias tyres. It is important for this to sustain going forward and allow players to retain the margin benefit

Apollo Tyres trades at 7x FY16E earnings, broadly in line with its long-term historical average. On the other hand, most other tyre stocks have seen a sharp re-rating. Apollo is trading at a 40% discount to MRF compared with its historical discount of 15%. Hence, its valuation looks attractive.

Dalmia Bharat Ltd: Target price Rs 585:

Dalmia is a pure-play cement company with presence in South, East and North East India. The global investment bank is positive on acceleration of cement demand growth in FY16 and FY17 and likes Dalmia for its: (1) strong operating leverage (65% utilisation), (2) likely gains from group consolidation, (3) end of capex cycle by Mar-15 where Dalmia cement capacity will increase to 24 mt vs most other mid-caps have smaller scale at 10-12 mt.

Dalmia is trading at attractive valuation of less than US$80/t on EV vs replacement cost of US$120/t. CS expects Mar-15 quarter results for Dalmia to be strong with EBITDA/t higher than Rs 1100/t vs Rs 700/t reported in the Dec-14 quarter driven mainly by strong realisations in South. Dalmia stays as one of our top picks in the mid-cap cement.

IRB Infrastructure Ltd: Target price Rs 340 :

IRB has built a strong portfolio of 21 road assets, which are geographically diversified, and include a good mix of operational and under-construction projects. It has a strong EPC arm with a track record of completing large projects on time within cost estimates.

IRB is one of the few large bidders looking to bid for BOT projects even as most of the developers including large ones like L&T and GMR have chosen to stay away.

Its recent capital raising (Rs4.4 bn for 6% dilution) has enhanced IRB’s ability to participate in the road development opportunity that exists in the Indian market.

Kajaria Ceramics Ltd: Target price Rs 950:

Kajaria is the largest tiles manufacturer in India with attractive financial metrics: 25% earnings CAGR over FY15-17, 25%-plus ROE, net debt-equity of below 30%. While current discretionary demand is weak across segments, the company should still record 13-14% volume growth and 20% revenue growth this year.

Further, the company has significant capacity expansion plans in place which can support growth going forward (45% between FY14 and FY16). The company could also be a beneficiary of GST which might make unorganised players less competitive.

While the valuations appear rich, Credit Suisse believes that the structural growth story is strong and valuation is reasonable compared with many peers in consumer discretionary sectors. The global investment bank has an OUTPERFORM rating on the stock with a target price of Rs950 based on 29x FY17E EPS.

Kaveri Seeds Ltd: Target price Rs 1100:

Kaveri is the largest pure-play seeds company in India with a significant market share in cotton, corn, millet and paddy seeds. It is the No. 2 player in cotton, No. 4 player in corn and is among top 3-5 players in millets, paddy, sorghum and sunflower.

The company has delivered 50%-plus revenue/earnings CAGR over the past five years, driven by success of a blockbuster cotton seed in the Andhra Pradesh market.

While valuations have re-rated over the past year, Credit Suisse do not view them as excessive given the large market opportunity, likely strong earnings growth and strong financial metrics-net cash company, with strong operating cash generation, low working capital requirement, high EBITDA margins, and high return ratios.

VA Tech Wabag Ltd: Target price Rs 1013:

VA Tech is one of the larger players in the Indian water treatment market with about 2% market share (15% in its currently addressable market). Its superior project management skills, strong brand name and a significant reference list give it strong positioning within a highly fragmented segment.

Market leadership in a multi-year growth story can help the company sustain rich valuations. Given the significant water scarcity in India, Credit Suisse believes the underlying industry can witness secular growth of 15%-plus for many years and VA Tech can potentially gain market share and improve on margins, leading to a 20%-plus EBITDA growth.