Engineers India has gotten clobbered because the results have not been the best. Here, you cannot see the first two quarter results because these are project based companies where you see most of the revenue getting booked in the third and the fourth quarters. Thus, the first two quarters are really deceptive, if you only see those.
Going ahead, we have a coverage on Engineers India and we have a target of 330 odd on FY16 estimates. The company has a good order book of about 4000 odd crore. Out of that order book, 68-69% of the businesses have high margin.
Hence, we have an estimate that in the next couple of years, the margin improvement will be very good for the company and the EBITDA margin can go as high as 20-23%. Thus, if one has to avoid investment perspective of two years, the company from these levels can also give a very good return. Moreover, the company also has cash plus per share of about Rs 50-52, so that gives a relation of comfort in this kind of a company.
We have initiated coverage on Tractors India Limited. It is a 400 crores market cap company which did a sales of about 1,300 crores last year.
Once the demand picks up as far as the construction equipment or the material handling equipment or the cranes and road construction equipment, the profitability will go up tremendously based on capacity utilisation going up and they had done capacity expansion in the last two-three years, this company generally benefit with a push which we are expecting the government to give in the budget also next year and with interest rate cuts also round the corner which can happen any time from now till next year, early next year, so that benefit will come in companies like Tractors India which are totally linked to economy so this would be one new pick that we have initiated coverage on.
Vardhman Textiles is still available at a very decent valuation of about 3-3.5 times EV by EBITDA.
Housing Finance Companies:
We have been quite bullish on the housing finance companies. They continue to do well. We are still bullish on LIC Housing Finance, Can Fin Homes, and even power finance companies like Power Finance Corporation.
Oil & Gas stocks:
IGL would remain one of our preferred picks right now, though the stock has been subdued because of the court case and the verdict which is getting delayed.
Once that hangover is out of the way, the stock can see re-rating from these levels. Hence, the stock will keep on trading up and down from current levels. The kind of expansion that we can see in IGL going ahead can be really good.
When it comes to ONGC, with the disinvestment around the corner, the stake sale by the government should happen now. Once the reworking in the sharing is happening, ONGC would be a very good long-term bet. In the short term, the stock will still remain subdued.
As far as oil marketing companies are concerned, any correction in those stocks should be bought into. We saw a good correction happening just till about one week back and now the stocks are again going up. You should wait – you will get those pockets of corrections in OMCs, but one needs to have a long term perspective as far as OMCs are concerned. Because one set of reforms just got over and the second set of reforms might take some more time, you will get time to buy OMCs. Do not chase them right now, but perhaps buy them whenever they correct.
Banks & NBFCs:
The commentary of the RBI Governor was positive. That kind of a movement makes sense because we have seen a good rally in large cap. Last few days have been dominated by large cap stocks and we saw a good rally in banks, Bank Nifty and a lot of other large cap stocks.
Max India & other insurances companies:
Max India is under our coverage, but with the kind of rally we have seen, I feel that once the insurance bill is passed, one final spurt can happen. Max is not really cheap at these valuations. It is already trading at a good valuation and now the recent spurt is more because of the insurance bill being in the news.
As regards Reliance Capital, with the kind of stake sale which came in the Reliance Mutual Fund with this also, there is a lot of scope even from these levels. If one were to invest for the next couple of years, even Reliance Capital from these prices should be a good investment.
Among the new ones, we like the power transmission space. Kalpataru Power is a new such bet for us. We feel that the stock is cheap as far as the valuation is concerned. It can give you a decent upside. Now they are done with the bad times as far as the subsidiary JMC project is concerned. So, the future looks good for Kalpataru Power.
Texmaco Rail also has a huge potential from a two to three-year perspective. Many opportunities can come their way from dedicated freight corridor. Also, they can provide great value through Kalindee Rail. So, these two stocks have a good potential in the next couple of years.
Auto ancillary stocks:
The auto ancillary stocks that we track – JK Tyre, Motherson Sumi, Ahmednagar Forgings – have been performing very well. Quarter on quarter, their performance is good.
JK Tyre is adding capacity, which will start getting results from FY16 and FY17 onwards. Similarly, Ahmednagar Forgings, the capacity utilisation of the capacity which had come in last year, is improving and they are adding more capacity also. When it comes to Motherson Sumi, the European company they had acquired, the margins are improving.
Thus, I do not see any reason to at least book profits there since now we are looking at economy revival and auto sales improving. Even CVs – which right now have not really starting contributing – will start contributing going ahead.
Thus, auto ancillaries should do very well even going ahead. One needs to have a little longer term perspective and one should look at the next two-three years.
Buy Midcaps on dips:
The midcaps were subdued for some time. They also had to do some catching up, and when people are looking at ideas, they need new stocks where they can invest and that is the where the value lies.
Looking at the potential people are seeing in India, if people are not satisfied with buying stocks for a 15%-20% return and they are still looking at 30-40% return going ahead, that is where the value is going towards midcaps.
There is a possibility that you can see some correction in market prices and those would be all bull run correction – whether the longer term perspective is still on the upside and the potential is really good if you are looking at a 12 months to 36 months investment even from these levels. Thus, any dips should be bought in the market. More stocks will join the rally going ahead.