Top 10 Midcap Value Picks

We are always on the lookout for good companies with a strong growth track record and potential and whose shares are available at attractive valuations. The best case scenario is to find mid-caps which are trading at low valuations or in single-digit price to earnings (PE) multiples on the basis of their trailing one-year earnings. Low valuations mean that the downside is protected while leaving huge scope for appreciation in the stock prices. The factors to look out in finding such good companies are the dividend track record, cash flow from operations, return ratios, management track record and the future prospects.

Havells India

Havells India is a leading manufacturer of low-voltage electrical equipment such as switchgears, wires & cables, lighting & fixtures, fans and electric motors. The cables and wires segment contributed 44% to Havells’ total revenues in FY09. Havells India has announced its foray into the new- generation ceramic metal halide (CMH) lighting business recently. Havells’ plans to extend its product portfolio by introducing CMH, a new generation lighting which has a high CRI (colour rendering index) and is considered the closest substitute for natural light. Havells India plans to manufacture one million CMH lamps and is targeting revenues of about Rs 100 crore on an annualised basis at peak production. Havells India also wants to deepen its penetration in Western India. Havells plans to double the region’s contribution to the net revenues from the current 12% in a span of one year.

In the quarter ended December 2009, Havells’ segment revenue was up 16%. In terms of profitability, Havells’ switchgear segment is the most important segment, accounting for over half of Havells’ PBIT during FY09.

In the past few years, Havells India has greatly expanded its consumer durables business and the division now accounts for nearly 10% of revenues and nearly 15% of the PBIT. The segment witnessed strong growth in the third quarter with an over 100% growth in PBIT on a 50% growth in revenues over the corresponding quarter a year ago. The lighting and fixtures business unit has also maintained an average growth of 23% in the past three quarters and exhibited the second highest growth in profits for the December quarter.

Havells has also ventured into retailing through its initiative called ‘Havells Galaxy’ to provide one-shop solution to the consumer looking for electrical and bath fittings products. Havells India’s international business is represented by Sylvania, the European company it acquired in 2007.

In the past five financial years, Havells’ standalone net sales have increased at a CAGR of 37% while both the net and cash profits grew at a CAGR of 47% during the period. However, due to the sluggish performance of Sylvania, Havells reported flat revenues for FY09 and a net loss of Rs 160 crore.

Havells India is currently trading at 14x its estimated earnings for FY10 which is quite reasonable given its growth plans.

Sunil Hitech Engineers

Sunil Hitech is engaged in the fabrication, erection and commissioning work in the power sector. It provides engineering required to build power plants. It has an order book of Rs 2,062 crores, which is 3.5 times its 2008-09 revenues. The earnings are visible for at least two years.

Sunil Hitech has been awarded balance of plant (BOP) power projects from Mahagenco and L&T. This will add value to the engineering work done by Sunil Hitech. The advantage of these projects is that Sunil Hitech will qualify for BOP contracts of up to 250 MW and also becomes a candidate for large size projects in this segment with higher revenues and profit margins.

Sunil Hitech possess a robust order book, The order book as of 30th Jan 2010 is 3.37 times of FY09 sales. The outlook for the industry has also improved as more power companies which had earlier deferred their plan, has also started to implement the projects. Thus, with its strong order book and improving outlook, Sunil Hitech can be expected to report healthy revenues in the coming quarters.

Sunil Hitech’s revenue is expected grow at 31% & 27% respectively in FY10 & FY11. The stock discounts FY09, FY10E and FY11E adjusted earnings of Rs 19.7, Rs 25.26 & Rs 31.86 at 10.7x, 8.4x and 6.65x respectively. The stock trades at 1.5x for FY09, 1.3x FY10E and 1.1x for FY11E to book value. The ROE and ROCE for FY11E is 17.2% & 12.6% respectively.

Sunil Hitech’s stock is currently trading at a PE multiple of 8 times. This is not expensive given that Sunil Hitech is operating in a growing industry and is expected to report strong growth in earnings over the next two years. Historically, Sunil Hitech’s stock has been trading in the range of 10-22 multiples, which makes the current PE very attractive. It is reasonable to expect that Sunil Hitech will enjoy a growth in earnings as well as a re-rating in the sector.

Apollo Tyres

Apollo Tyres is the country’s largest Commercial Vehicles tyre maker.The auto sector had a disappointing performance in FY 2008-09. However, in FY 2009-10, the story is different. The sales in all key auto categories of cars and commercial vehicles (CVs) have been much higher. Sales of commercial vehicle and passesnger vehicles have both increased substantially.

Apollo Tyres reported in the Quarter ended December 2009 consolidated revenues of Rs 2,296 crore represetning 12.2 per cent sequential growth.

Apollo Tyres‘ OPMs fell 90 basis points to 15.4 per cent despite Apollo increasing prices by 5-10 per cent. This was because of higher raw material (natural rubber) costs. As natural rubber prices are at historical highs, Apollo Tyres‘ margins may be under some pressure in the fourth quarter as well.

Apollo Tyres has commissioned its Chennai plant in the first quarter of 2010-11. Apollo Tyres has also completed a brownfield expansion by March 2010. These should help Apollo meet the increased demand for radial tyres.

Apollo Tyres has subsidiaries in South Africa (Dunlop) and Netherlands (Vredestein). Apollo Tyres has announced plans to improve the utilisation levels and operating profit margins of the subsidiaries. If it manages to do that then overall margins could improve going ahead.

At the CMP of Rs 55, Apollo Tyres is trading at 7.3 times its 2010-11 estimated earnings. This is quite reasonable.

Amara Raja Batteries

Amara Raja Batteries is India’s second largest battery manufacturer. Amara Raja Batteries has registered a 50 per cent CAGR in revenues over the five year period FY04-FY09. Amara Raja Batteries‘revenues are split equally between industrial and auto segments. Amara Raja Batteries is expected to have revenues of about Rs 1,400 crore in FY 2009-10.

In the December 2009 quarter, Amara Raja Batteries‘ revenues were higher by 10 per cent to Rs 366 crore and it doubled its net profits to Rs 40 crore. The operating profit margins improved by 500 basis points to 19 per cent over the year ago quarter.

Amara Raja Batteries‘ key raw material is lead. lead prices which had doubled over the past year are expected to stabilise in the $2200-$2400 per tonne range. With this, Amara Raja Batteries‘ margins can be expected to stabilize.

Amara Raja Batteries‘ depends on the telecom sector for upto 60 per cent of the industrial segment revenues. Amara Raja Batteries is also looking to increase its share in the railways and the utilities segments.

Amara Raja Batteries‘ sales in the automotive segment were bouyed by the strong demand from OEMs and commercial vehicles.

Amara Raja Batteries‘ revenues also depend heavily on the replacement market. This again is expected to be bouyant in the near future.

Amara Raja Batteries is currently trading at Rs 152 which shows a Price Earnings ratio of 7.2 times its 2010-11 estimated EPS of Rs 21.

Dishman Pharmaceuticals

Dishman Pharmaceuticals has seen strong growth in the past few years. In the period 2004-2009, its sales grew 27 per cent on a CAGR basis while the profits grew 37 per cent during this time.

Dishman Pharmaceuticals core business is ‘Contract Research and Manufacturing” (Crams). Dishman Pharmaceuticals also operates through four business segments or divisions which includes marketable molecules (MM) and its two acquisitions, Dutch company Solvay’s vitamin business and Swiss-based Carbogen-Amcis (CA) which offers drug development and commercialisation services.

Dishman Pharmaceuticals prospects from this contract research business is good though it is vulnerable to a cut down in R & D spending by pharma MNCs who are its customers.

Dishman Pharmaceuticals‘ Carbogen business saw a 41 per cent year-on-year drop in revenues in the Quarter ended December 2009 to Rs 67 crore. Dishman Pharmaceuticals‘ marketable molecules (MM) division saw a 48 per cent decline in due to a plant shutdown for FDA inspection. Dishman Pharmaceuticals’ overall revenues saw a 21 per cent dip in the December 2009 quarter at Rs 222 crore.

In FY 2010-11, Dishman Pharmaceuticals expects an overall revenue growth of 20 per cent due to higher business from Solvay and Astra Zeneca, the commencement of its Chinese operations and the entry into the high potency drugs.

Dishman Pharmaceuticals‘ has been subdued in the recent past owing to the said uncertanities. At the CMP of Rs 207, the stock is trading about 11 times its 2010-11 estimated EPS of Rs 18.5. Given that the overall growth prospects are robust, the valuations are reasonable.

Bharati Shipyard

Bharati Shipyard has been adversly affected by the slowdown in the shipping sector and is trading at a low PE valuation. Bharati Shipyard‘s stock is currently available at 4-5 times its 2010-11 estimated earnings.Bharati Shipyard does have a strong order book of about Rs 5,000 crore, which is more than five times Bharati Shipyard’s 2008-09 sales. This provides good revenue visibility for the next two years.

Bharati Shipyard can be expected to garner new orders from the defence segment given that India is looking for reducing its dependence on imports. the offshore vessels segment is another vital source of revenue for Bharati Shipyard and some revival in the offshore activity is visible.

Bharati Shipyard‘s recent acquisition of Great Offshore will prove beneficial as the offshore exploration sector expands in view of the fact that Great Offshore is well entrenched in the business of providing offshore oil services.

Jindal Saw

Jindal Saw has a diversified product portfolio of pipes supplied to customers in the auto, power, water, sewage and oil and gas sectors. The potential for the products of Jindal Saw is immense and the rising demand in the user industry augers well for Jindal Saw.

Jindal Saw has an order book of about Rs 3,400 crore (including export orders worth Rs 1,200 crore), which provides good visibility for the medium-term.

Jindal Saw will benefit from the growth in the demand from the water and oil and gas sectors. There is also increasing demand on account of new gas discoveries and increased capital expenditure on exploration and production activities. GAIL, a leading player in the Gas sector is expected to finalise three new pipelines and could award orders to the pipes industry for about 1 million tonnes of pipes over the next 12 months, including orders for 400,000 tonnes of saw pipes by March 2010.

Jindal Saw is expanding its capacities and setting up 200,000 tonne ductile pipe capacity and 100,000 tonne HSAW capacity, which will be operational by June 2011 and December 2010, respectively.

Jindal Saw has signed an equal joint venture agreement with Philippines-based Manila Water Company Inc to jointly develop new businesses in India. The joint venture will plan and develop water supply, waste water management and environmental services-related projects in Rajasthan, Gujarat and Maharashtra. The JV plans to make an initial investment of USD 1 million into the project development company, which will target various cities for water concessions.

Manila Water is the water utility arm of Ayala Corp, Philippines’ oldest arm. It is expected that within six months projects will be developed on water concessions. The model of the JV is to identify high-potential cities and have private concessions with them.

Jindal Saw has cash reserves of USD 260 million and will fund the joint venture through internal accruals and does not plan to raise funds immediately. Jindal Saw is expected to earn revenues of USD 100 million anually from this joint venture within three years.

Jindal Saw‘s revenues and earnings are expected to grow at about 18-20 per cent annually, over the next couple of years.

C&C Constructions

C&C Constructions is a construction contractor available at attractive valuations. C&C Constructions’ core competency is road infrastructure. That segment accounts for nearly 60 per cent of the order-book. It is expected that the focus on infrastructure development will result in increased spending on road infrastructure.

C&C Constructions is alos engaged in BOT projects and other infrastructure spaces such as railways, water and sanitation, as well as commercial buildings.

C&C Constructions‘ order book has grown constantly from a mere Rs 109 crore in 2004-05 to currently at Rs 3,100 crore, which is about four times its 2008-09 revenues. The order-book features overseas exposure in projects in challenging areas such as Afghanistan, which offer superior margins.This ensures earnings visibility in the next 2-3 years. The roads segment accounts for almost 56 per cent of the order book followed by buildings at 27 per cent, railways at 13 per cent and water and sewerage accounting for the balance.

C&C Constructions is also entering segments like water and power transmission. It has got a contract from Power Grid for supply and errection of 400 kv transmission lines.

C&C Constructions‘ sales have shown strong growth at 50 per cent-plus over the past four quarters, despite the general economic slowdown. The growth in sales suggests that the execution is fast-paced and this ought to allow it to secure more contracts while building on its credibility. C&C Constructions has traditionally banked on joint venture partners to qualify for bigger bids and enter new construction segments though it has also managed to bag projects on its own merits.

C&C Constructions‘ stock is trading at 8 times its trailing earnings and 4.5 times its estimated earnings for year ending June 2010. The valuations look good considering the strong order book and future growth prospects. It is expected cthat C&C Constructions‘ revenue will grow by 50 per cent annually for 2009-10 and 2010-11. Growth beyond 2010-11 should also remain good considering the opportunities in the sector.

J Kumar Infra

J Kumar Infraprojects is a civil engineering and infrastructure development company with a primary focus on development of flyovers, skywalks, roads, bridges, airport runways, commercial and residential buildings, railway buildings, sports complexes, and irrigation projects.

J Kumar Infra has done well to diversify its operations from predominantly bridges and flyovers to civil construction and piling works. Piling works for larger infrastructure players are likely to provide J Kumar Infra with superior profit margins.

The present infrastructure boom in the country provides ample room for small players such as J Kumar Infra to share a part of the order flow pie.

J Kumar Infra mostly undertakes projects of government agencies, where investments are higher and are less affected by economic slowdown. Also, though the majority of J Kumar Infra‘s revenues come from Maharashtra, J Kumar Infra is now moving into other states on the back of its increased scale and bidding capacity.

J Kumar Infra’s current order book of Rs 1,300 crore with an average execution period of less than 2 years and aggressive bidding provides revenue growth visibility over next two years. Currently, J Kumar Infra has Rs 3,000 crore worth of contracts under bidding and plans to bid for contracts worth INR 40 billion and INR 60 billion in FY11 and FY12 respectively. In view of J Kumar Infra‘s healthy order book and superior margins, it is reasonable to expect J Kumar Infra‘s net profit to grow at a CAGR of 59.5% during FY09-FY11E. It is currently trading at 6.1x its FY11E EPS.

Sasken Communication

Sasken Communication Technology Ltd (Sasken) is an embedded communications solutions company that helps businesses across the communications value chain to accelerate product development life cycles through a unique combination of research and development consultancy, wireless software products and software services.

Sasken employs more than 3,200 people operating from state-ofthe-art research and development centers in India, Finland, Mexico and the US. Over the years Sasken has grown organically as well as inorganically by acquiring stakes in several small companies.

Sasken’s business is organised into telecom software products, services and automotive, industrial and utility business. Though software products were the key contributor to its topline accounting for 40 per cent historically, currently services contribute almost 95 per cent to the topline.

Sasken has been able to improve its margins in 2008-09 to 23.5 per cent from 14 per cent in 2007-08, on the back of a 22 per cent growth in revenues and lower selling and administrative costs. However, the cut in R&D expenditure of communications companies has dented revenues as well as margins in the current fiscal. For the 9 months ending December 2009, sales were down 21 per cent while operating profits were down 37 per cent with margins at 17.6 per cent. How the margins move going ahead will depend on the pace of pickup in IT spending of communications companies.

In FY04-09 Sasken recorded a 23 per cent CAGR in sales.

In Q3FY10 Sasken‘s revenues (including forex gain/loss) stood at Rs. 1,475.4 million, registering a growth of 8.8% QoQ. Revenues from its software services segment grew by 8.6% QoQ to Rs. 1,289.6 mn, while revenues from its telecom software products & network engineering services grew by 9.4% and 7.5% to Rs. 75.7 mn and Rs. 106 mn respectively. At the CMP of Rs 173 the stock is available at 7.1x & 6.3x FY10E & FY11E earnings of Rs. 24.5 & Rs. 27.5 respectively.