Kotak Securities have recommended 10 Top Mid-Cap Shares for purchase by investment. Kotak Securities have suggested that these shares could yield from 10% to 26% return in the medium to long-term. While some of the share recommendations are from the industrials/infrastructure-related segments, the others leverage robust domestic consumption. Kotak Securities have avoided stocks from cyclical industries (where there are higher earnings risks), technology (where large-cap is to be preferred over mid-cap stocks) and telecom (where Kotak maintains a cautious stance based on higher competitive intensity).
All stock recommendations are of companies that are fundamentally strong and with strong growth prospects.
We examine the share recommendations to see whether these stock picks should be purchased for your investment portfolio.
BGR Energy Systems Ltd
BGR Energy has been growing at a scorching pace. BGR Energy‘s 3 year CAGR Profit has grown at 69% while BGR Energy 3 year CAGR Sales has grown at 57%. BGR Energy has a Return on Equity (ROE) of 31%.
BGR Energy hit a 52-week high of Rs. 814 after forming a JV with Hitachi.
The stock of BGR Energy has outperformed the market in the past one quarter, gaining about 36% as compared to the Sensex’s 6% rise.
BGR Energy has an equity capital of Rs 72.08 crores. BGR Energy‘s first joint venture (JV) with Hitachi, Japan, is for design, manufacture, installation and commissioning of supercritical steam turbines and generators for thermal power plants while the second joint venture with Hitachi Power Europe GmbH, Germany, is for supercritical steam generators for thermal power plants.
Both the JVs will be set up by BGR Energy in Tamil Nadu with an estimated cost of Rs 4400 crore. BGR Energy will hold 74% in the turbines JV and 70% in the boilers JV, while the rest will be held by Hitachi.
BGR Energy Systems‘ net profit jumped 199.1% to Rs 60.54 crore on 191.1% rise in net sales to Rs 905.43 crore in Q1 June 2010 over Q1 June 2009.
Biocon is in good financial shape with a debt-equity ratio of 0.31. Biocon has had a 3 year CAGR sales of 33% and a 3 year CAGR profit increase of 14%. Biocon offers a ROE of 18%.
Biocon has been in great demand on news of a deal with Pfizer. Biocon is trading at close to its 52 week high of Rs. 390.
There has been a lot of speculation that Pfizer and Biocon are likely to announce a large transaction. It is well known that Pfizer is actively looking for acquisitions and tie-ups in India and abroad to boost its portfolio of patented drugs. Pfizer has a budget of about $200 Million that it can spend on the acquisition.
Biocon has also made it public that it is expanding into the critical care segment and intending to provide treatment for hospital infections, including post surgical complications and trauma. Biocon‘s Chairman and Managing Director Kiran Mazumdar Shaw said that there was large demand in this segment.
Biocon intends to introduce five new products in the initial phase of launch for the treatment of critical illnesses like septicemia and other acute hospital infections. The new comprehensive care division will be the fifth division for Biocon, complementing the existing product portfolios in diabetology, oncology, nephrology and cardiology divisions.
Biocon also announced that it has entered into an agreement with Teleradiology Solutions, a pioneer of the domain in India to provide teleradiology reporting services to Clinigene, Biocon‘s Clinical Research Organization. Teleradiology Solution‘s quality-driven reporting process and cutting-edge technology platform have the potential to greatly benefit biotech and pharma companies, obviating delays in the completion of clinical trials by optimizing the radiology reporting process.
INDIAN OVERSEAS BANK
The PSU Bank sector has a lot a choices.
Indian Overseas Bank (IOB) has been a bit of a laggard. Indian Overseas Bank (IOB)‘s 3 Year CAGR Income has increased 20.66% while its 3 Year CAGR Profit has declined 8.74%. Indian Overseas Bank (IOB)‘s ROE is 11.50%.
Indian Overseas Bank (IOB) is a good stock pick because IOB is seeing an interesting turnaround in asset quality after having one of the highest slippages and restructured loans compared to the industry in FY2009-10. IOB‘s Gross NPLs are currently at 4.3% of loans.
IOB‘s valuations are attractive at 0.9X FY2012 PBR and 5.6X PER giving an upside of over 15%. Also IOB has limited downside risk.
GVK Power & Infrastructure Ltd
GVK Power & Infrastructure has been a good performer. GVK‘s 3 Year CAGR Sales were high at 64.88% while GVK 3 Year CAGR Profit was 38%.
GVK Power & Infrastructure‘s USP is that it is operating in the infrastructure domain with a diversified portfolio
GVKPIL is a leading player in the infrastructure domain with presence across several verticals such as airports, power, roads and urban infrastructure. Its current portfolio includes:
– Airport: GVKPIL presently has two airports viz. Mumbai and Bangalore international airports in its portfolio. GVKPIL is developing the Mumbai International Airport to handle a peak annual capacity of 40 mn passengers (includes rights to develop 198 acres of real estate in the airport’s vicinity). GVKPIL also recently acquired a 29% stake in Bangalore Airport (BIAL).
– Power projects: GVK Power & Infrastructure currently has six power projects either operational or under development totaling to a cumulative capacity of over 2,000 MW. In addition, GVKPIL is also developing two coal mines in the state of Jharkhand.
– Roads: GVK Power & Infrastructure holds 100% equity in the GVK Jaipur Expressway Pvt. Ltd (GVKJEL), formed to execute a 90-km stretch on Delhi-Mumbai highway (NH-8). In addition to this, GVK has also recently won the `8.5 bn Kota-Deoli road project.
– SEZ development project: GVKPIL, in collaboration with TIDCO, plans to develop a multi-product SEZ with a total area of 2,604 acres in Perambalur district of Tamil Nadu.
JAGRAN PRAKASHAN has been on a steady path with a 3 Year CAGR sales growth of 16% and a 3 Year CAGR Profit Growth of 31%. JAGRAN PRAKASHAN has low Debt-Equity of 0.22 and offers an attractive ROE of 30%.
JAGRAN PRAKASHAN, compared to its peers in the print media sector, is attractively valued. The important aspects to be borne in mind with regard to the JAGRAN PRAKASHAN stock are (1) the sharp recovery in the Indian advertising market and the (2) benefits of economic growth spreading to Tier-II and III towns and cities as well as rural areas of India. Kotak Securities claims that its’ 12- month DCF-based target price for JAGRAN PRAKASHAN stock is Rs. 145 resulting in implied valuation of 22X and 19X FY 2011E and FY 2012E EPS. Kotak Securities is quite confident that JAGRAN PRAKASHAN‘s earnings may beat expectations with (1) potentially stronger-than-expected growth in advertising revenues and (2) the aggressive assumptions on higher ‘cost of doing business’ in competitive JAGRAN PRAKASHAN markets.
Kotak has also highlighted that JAGRAN PRAKASHAN’s earnings are understated due to high dividend payout ratio versus peers.
MAHINDRA LIFESPACE DEVELOPERS
Kotak says that it sees good sales momentum on the standalone residential business in Bhandup and Gurgaon of MAHINDRA LIFESPACE DEVELOPERS. Most of MAHINDRA LIFESPACE DEVELOPERS’ residential projects are under construction and hence sales momentum will drive revenue booking. MAHINDRA LIFESPACE DEVELOPERS‘ Jaipur SEZ continues to see good progress in terms of land acquisition,client additions and infrastructure development. Kotak has an ADD rating on MAHINDRA LIFESPACE DEVELOPERS with target price based on NAV (Sep-2011) of Rs. 540/share. Kotak believe the SEZ business of MAHINDRA LIFESPACE DEVELOPERS offers substantial upside to the target price.
Marico is Kotak’s top mid-cap. pick in the consumer sector with ADD rating and target price of Rs 140. Kotak estimates an EPS CAGR of 21% over FY2010-13E for Marico led by (1) continuing good growth in Parachute hair oil, (2) likely faster growth in Saffola edible oil and (3) scaling-up of international operations including entry into newer geographies. Kotak believes in Marico’s ability to (1) grow the core business, (2) realign consumer perception of Kaya clinics from ‘cure’ to ‘care’ and (3) stage a potentially successful entry into cooling hair oil.
Kotak likes NAGARJUNA CONSTRUCTION based on (1) its attractive valuations, (2) strong growth visibility based on order backlog, (3) ramp-up of business segments in areas like metals, power and international – areas that hold immense potential, (4) strong progress in BOT projects and (5) long-term outlook of strong infrastructural investments. Kotak believes that the current stock price may not fully reflect earning potential of strong order backlog of NAGARJUNA CONSTRUCTION. NAGARJUNA CONSTRUCTION is trading at a strong discount to its historical average valuations. Kotak expects execution by NAGARJUNA CONSTRUCTION to pick up in FY2011E and FY2012E and estimate a revenue growth of 23% and 24%, respectively.
Kotak’s BUY rating on SADBHAV ENGINEERING is based on (1) relatively attractive valuations, (2) strong order book, which provides near-term earnings visibility and (3) positive long-term outlook for infrastructure investments. Kotak estimate that SADBHAV ENGINEERING could potentially raise Rs 453 mn from the upcoming rights issue and Rs 0.8 bn from exercise of warrants. With a stronger balance sheet post-issue, SADBHAV ENGINEERING may fund the bulk of equity for BOTs by raising debt at parent level and may not need large divestment in Sadbhav Infrastructure Project Ltd (SIPL).
Shree Cement is Kotak’s preferred stock in the cement sector given its (1) high profitability (2) proven track record of strong execution and (3) stable and attractive earnings from portfolio of power projects. Kotak estimates new capacity additions in the cement and power segment to drive revenues of Shree Cement at 8% CAGR over FY2010-12E. Kotak’s target price of Rs 2,550 implies adjusted-EV/ton of US$112/ton on FY2012E production of Shree Cement compared to the current replacement cost of US$110-120/ton. At the current market price of Rs 2,029/share, the stock of Shree Cement is trading at an EV/EBITDA of 3.3X on FY2012E EBITDA and adjusted-EV/ton of ~ US$70/ton on FY2012E production.