25 Mid-Cap Picks

What does an FMCG company, a mid-size bank and a bearing company have in common?  Surely these are three completely different companies from three completely different fields. Yet there is one thing that connects them - a mete-oric rise that these counters have witnessed in the last one year.

In a span of just 12 months, these stocks have grown rapidly to provide stupendous returns to the investors. Imagine an FMCG company that gives returns of 125 per cent. This is exactly what happened with P&G Hygiene & Healthcare. Meanwhile, people who had invested in Karur Vysya Bank literally laughed all the way to the bank with 115 per cent returns jingling in their pockets. SKF Bearing also provided returns of as high as 105 per cent.  But why are we talking about these companies now? Well, apart from the fact that all these stocks have provided astounding returns, there is something else which they share in common.

All these recommendations were a part of our Cover Story titled ‘20 Mid-Cap Value Picks’ published in our Issue 16 dated July 20-August 02, 2009. Apart from this, the average portfolio return from this 20 mid-cap value picks stands at 48.10 per cent as against the Sensex returns of just 28.73 per cent. You may well recall here that we had asked investors to book profit in many counters in a span of just two months. So the actual returns would be higher than indicated here. Now, we are launching the second version of this hugely successful lead story and going ahead would probably make this a yearly feature.

The only difference this year is that, for the benefit of our readers, we are recommending 25 companies instead of 20. There are numerous mid-cap counters. However, the issue is that while there are numerous mid-cap companies out there which appear like they are going to be the next big thing, it is doubtful if all of them will succeed in attaining the desired high level. Further, we can tell you from experience that the superficial charms of many of them will fade away within a short span of time. The idea therefore is to stay away from such counters and to spot the real good ones so that you can make money. That is the reason why we have recommended some value picks.

Strategy
First and foremost, let us understand what a mid-cap entity is. It is a company which has a market capitalisation more than Rs 1,000 crore and less than Rs 5,000 crore.

As stated above, mid-cap companies need a careful selection strategy and that is what we have done. We have chosen only those companies that have posted YoY and QoQ growth in topline as well as bottomline for Q4FY10. The idea behind doing so is that it clearly shows that the company is growing. Further, the criterion has been quite stringent in terms of the liquidity of the scrip on the bourse so that investors should get proper entry and exit points. [PAGE BREAK]

The yearly financial performance and the business model have also been considered before recommending these stocks to our investors.

This is something we had done while doing our 20 mid-cap story too and it had helped investors generate solid returns in a short span. To put it in a nutshell, we have taken efforts to recommend a stock with the utmost caution and have handpicked these mid-cap counters for the benefit of our readers. Our 25 companies present a good mix from sectors such as banking, FMCG, infrastructure, automobile components, engineering and IT.

Our suggestion to investors is that they should go for any of these scrips with a long-term outlook. One can easily expect a 20-25 per cent appreciation in a one-year time frame.

Alfa Laval
Alfa Laval provides solutions for optimized processes that help industries become more competitive. The first and the foremost reason for recommending the stock is its MNC parentage. Recently, many MNC companies have come out with an open offer and hence one cannot deny the possibility of a ‘buy’ in Alfa Laval also. Its financial performance has also been good with its topline and bottomline increasing significantly in the trailing four quarters as compared to its preceding trailing four quarters. The scrip is trading at 21.50x of its TTM earnings and its EV/EBITDA is comfortable at 12.58x.

Allied Digital Services
Allied Digital Services is one of the leading IT infrastructure management and technical support services’ outsourcing companies. The most important factor for recommending the counter is our bullishness on the IT sector. The financial performance of the company has been very good and its topline and bottomline for the FY10 have increased to Rs 471.46 crore and Rs 103.76 crore as compared to Rs 393.97 crore and Rs 77.46 crore in FY09. Its TTM EPS stands at Rs 22.32, resulting in a P/E of 10.00x. Even its EV/EBITDA stands at 7.50x, thus providing good scope for upward movement.

Aventis Pharma
Many of the investors reading this feature may be puzzled to see Aventis Pharma as one of our recommendations since the performance of the company was not so good in the December 2009 quarter and for CY09 as a whole.
The company had posted a lower bottomline as compared to CY08.[PAGE BREAK]

However, at its current levels we feel that the recent acquisition of Shantha Biotechnics is expected to help the company in the long run. That apart, the consistent dividend payment, strong cash position and a debt-free status are additional beneficial factors.

BEML
Public sector units have always been safe bets. Even the dividend payments from the PSUs have been good. But along with these two factors, the financial performance of the company is also important.

BEML is one such counter that has all these three factors in its kitty. For FY10 it posted a topline of Rs 2,888 crore and bottomline of Rs 222.86 crore as compared to Rs 2,797 crore and Rs 268 crore in FY09. With the defence budget expected to increase, we expect the company to perform better in the next year also. The scrip is trading at 19x of its FY10 earnings. Its EV/EBITDA stands at 11.15x.

Blue Star
Blue Star is India’s largest central air-conditioning company. It is also into cooling products and professional electronic as well as industrial systems. With increased activity in the commercial real estate sector there is expected to be good growth in the company’s business.

The financial performance of the company has been quite impressive wherein it has posted a topline of Rs 2,573 crore and bottomline of Rs 211.48 crore. On the valuation front, its CMP of Rs 452 discounts its FY10 earnings by 19.23x. Even its EV/EBITDA is poised comfortably at 13.50x.

Century Textile & Ind.
Century Textile & Industries is mainly into the business of textiles and cement. Its cement division though has been a consistent performer with good profitability. Going ahead, we expect the cement division along with it realty business to drive the growth curve upwards for the company. On the financial front, the scrip has performed well wherein its topline stood at Rs 4,529 crore and bottomline was Rs 339.47 crore as compared to Rs 3,781 crore and Rs 236.54 crore respectively in FY09. On the valuation front, its P/E stands at 12.80x and its EV/EBITDA is at 6.21x.

CESC
Consistency is one factor which is highly rated in the stock market. CESC gets a consistent income on account of the demand supply gap in the power industry. Further, the company will be expanding its capacity in the next few years. The best part is that CESC has got the lowest EV per mega watt of Rs 6 crore. This is the best in the industry. On the valuation front, its CMP of Rs 402 discounts its FY10 earnings by 11.67x and even its EV/EBITDA stands at 6.54x.[PAGE BREAK]

Dena Bank
The first and the foremost factor for recommending Dena Bank to our investors is the strong financial performance posted by it in the past four quarters. Its last four quarter net profit has increased consistently on a QoQ basis which is a very positive factor and is an indication of the strong financial performance of the bank. As regards the other factors, its gross NPAs in Q4FY10 have declined to 1.80 per cent from its earlier level of 2.13 per cent in Q4FY09. On the valuation front, the scrip is trading at a price to book value of 1.10x which provides good scope for upward movement.

Elecon Engineering
Elecon Engineering caters to the needs of various sectors like power, mining, sugar, steel and port. With all the core sectors witnessing growth there is huge opportunity in store for the company. Currently, the company has an order book of around Rs 1,528 crore and another Rs 550 crore worth of orders are in the pipeline. On the valuation front, its CMP of Rs 91 discounts its FY11E earnings by 10.10x (EPS Rs 8.60). At its current levels the FY10 EPS stands at Rs 7.10, thereby resulting in a P/E of 12.75x. Hence, looking at the expected performance the scrip has good scope for further upward movement.

Finolex Industries
This is one of the few companies with backward integration for pipe manufacturing. But the performance of the company was not so good in FY10 on account of the volatile crude prices which directly make an impact on its raw material prices. However, the performance is expected to improve as the crude prices are now stabilising and the demand for the company’s products also has been improving. Further, the company also has a good land bank in Pune of high value which may soon be developed. On the valuation front, the scrip is trading at 8.00x (EPS Rs 10.70). Its EV/EBITDA is at a comfortable 4.40x.

Godrej Industries
It would come as a surprise to find Godrej Industries as one of our mid-cap buys since the company has been trading at too steep valuations. On the valuation front, its CMP discounts its FY10 earnings by 69.25x and even its EV/EBITDA stands at 75x. But here the fact is that there is embedded value in the company as it holds a stake in various group companies such as Godrej Consumer Products and Godrej Properties. That apart, the company also has some land bank which it may transfer to its group companies and hence may stand to benefit.[PAGE BREAK]

Great Offshore
Great Offshore is India’s most prominent integrated offshore oilfield services provider offering a broad spectrum of services to upstream oil and gas producers to carry out offshore exploration and production (E&P) activities. With the plenty of activity happening in the oil & gas sector the company is expected to be one of the major beneficiaries. Further, its strong financial performance is one of the added advantages. On the valuation front, the scrip is trading at 9.23x of its trailing four quarter earnings (EPS Rs 47.30). Even its EV/EBITDA stands at 7.45x. We recommend a ‘buy’ at these current levels.

IFCI
IFCI is one of the leading financial institutions in India. With the RBI and the government planning to provide a banking license to the NBFCs, IFCI seems to be headed towards being a major beneficiary.

Further, its equity portfolio and subsidiary companies are other reasons for buying the counter. In addition to this, the government’s focus on infrastructure is expected to create many opportunities for the company. Our recommendation to investors is that you should buy the counter at its current levels with a target price of Rs 75.

Jagran Prakashan
A strong financial performance is one of the major factors behind recommending Jagran Prakashan to our investors. While the other print media companies are struggling to get a grip on the growth curve, JPL has been growing consistently. Another advantage is that its advertisement rates have been increased and this is being reflected in its increasing topline.

With overall improvement in the economic scenario, we expect the company to perform better in the next fiscal also. On the valuation front, the scrip is trading at 5.85x of its trailing four quarter earnings. Its EV/EBITDA stands at 11.68x.[PAGE BREAK]

Jai Corp
Jai Corp is another stock which investors might be surprised to see in our list. That is because it is one of the highly speculated stocks on the bourses. But still we are recommending the counter to our investors on account of the strong institutional investment in this scrip. The institutional investment in this scrip as on March 31, 2010 has increased to 14.92 per cent. Actually the FIIs have increased the stake to 12.65 per cent during the same period from the earlier level of 11.80 per cent. Our recommendation to investors is to buy the counter at its current levels and hold the counter for the next one year.

Jyoti Structures
One of the major reasons for recommending Jyoti Structures is the strong financial performance of the company in FY10. But what makes the scrip more valuable is the impressive order book amounting to Rs 4,100 crore which almost doubles its FY10 revenues. This provides good revenue guidance and earnings’ visibility. JSL is looking at around 20 per cent growth in topline for the current year and to maintain EBITDA margins in the range of 11.5-12 per cent. On the valuation front, the scrip is trading at 13.83x of its trailing four quarter earnings and its EV/EBITDA stands comfortably at 6.35x.

NIIT Technologies
We have been bullish on the IT sector as a whole and NIIT Technologies seems to be an undervalued counter in the pack. Even after putting in a rock-solid performance in FY10 the scrip is available at 10.75x, while other IT counters of a similar business size are trading at more than 14x. We feel that there is a huge gap between the valuations and hence the scrip may soon catch up with the others. Our recommendation to investors is to buy the scrip at its current levels.

Pfizer
Pfizer, the listed Indian subsidiary of the world’s largest pharmaceutical company Pfizer Inc US, is one of the top MNC pharmaceutical companies operating in India. Its merger with Wyeth is likely to act as a major trigger for the company going ahead. Pfizer Ltd had close to Rs 270 per share of cash and cash equivalents as on November 2009. Besides, a debt-free and cash-rich status along with decent dividend payouts makes it a perfect candidate for investment. At its CMP of Rs 1208 the stock trades at a P/E of 21.50x for CY10E.[PAGE BREAK]

Sintex Industries
Sintex is one of the few companies that have performed well in Q4FY10 and managed to put in better results than Q3FY10 and Q4FY09. Further, with the US and European economies emerging out of recession and showing signs of growth, it textile division is also expected to do well. On the valuation front, its CMP of Rs 325 discounts its trailing four quarter earnings by 16x (EPS of Rs 20.20). Its EV/EBITDA seems to be on the higher side at 12x. But with the kind of growth expected in FY11 the valuations seem to be good.

SKF India
SKF India is a well-known name in the field of bearings. With the overall industry witnessing growth along with a boom in the auto sector, the company has all the demand drivers in place. Additionally, with India expected to become a hub for small car manufacturing, the company has huge scope to tap into. Being an MNC one cannot deny the possibility of a share buy-back that may be offered by the company. On the valuation front, the scrip is placed well. Its CMP of Rs 481 discounts its trailing four quarter earnings by 20.50x. This is much lower as compared to other peer companies.

SRF
Growing at a five-year CAGR of 22 per cent in profits, huge capex, a 17-year dividend track record, high dividend yield, and EV/EBDITA of a mere 4x makes SRF an attractive bet. To drive its future growth SRF has undertaken an aggressive capex of Rs 1,400 crore from FY08 through FY11 for expansion, backward integration and acquisitions. Coming to the financials, SRF posted revenues and profits of Rs 2,193.85 crore and Rs 309.42 crore for FY10. At these estimates SRF generates PE of 4.68x, which is low when compared to Century Enka’s over 6x.

Torrent Pharmaceuticals
The pharmaceutical sector is one that an investor considers playing as part of a defensive strategy. But we are recommending Torrent Pharmaceuticals as a strong ‘buy’. The financial performance of the company has been exceptional and this is quite visible from the fact that in FY10 it posted topline of Rs 1,448.95 crore and bottomline of Rs 207.37 crore as compared to Rs 1,179.71 crore and Rs 186.73 crore respectively in FY09. On the valuation front, its CMP discounts its FY10 earnings by 23x (EPS Rs 24.51). Our recommendation is that investors should buy the scrip with a perspective of one year.[PAGE BREAK]

UCO Bank
If there is one PSU bank that looks like a good attractive bet then it is none other than UCO Bank. In FY10 the bank grew quite briskly every single quarter on a sequential basis. The bank, which is expected to come out with a follow-on offer soon, has performed quite well on all counts, witnessing an increase in its net interest margin, a dip in its net NPAs at 1.17 per cent, good growth in total business and a healthy CAR of 13.21 per cent as compared to 11.93 per cent. On the valuation front, this briskly growing bank is available at a price to book ratio of just 1x.

Unichem Laboratories
Unichem Laboratories is another pharma company in our list. ULL is into formulations and active pharmaceutical ingredients (API). It has business interests in the US, European Union and some other countries. The period of FY10 has been good for ULL and its bottomline increased to Rs 133.93 crore as compared to Rs 124.75 crore in FY09.  It is a debt-free company and also cash-rich. On the valuation front, its CMP of Rs 473 discounts its FY10 earnings by 12.75x which is lower as compared to the other pharma companies. Even its EV/EBITDA of 8.80x seems to be in tune with the industry.

Zylog Systems
Zylog Systems provides complete product lifecycle management ser-vices, ranging from new product development and product advancement to product migration, re-engineering, sustenance and support. Its financial performance has been very strong in FY10 and on the valuation front its CMP of Rs 480 discounts its FY10 earnings by 8.55x which is lower as compared to its peers. Further, ZSL is investing Rs 200 crore to expand its wifi business over the next two years and expects business of around Rs 500 crore from the same. The company has already entered the internet service provider (ISP) space. BSE Code: 532883     FV: Rs 10   52 Week H/L: Rs 500/197  CMP: Rs 480.00ZYLOG SYSTEMS Market Cap: Rs 790 cr   TTM EPS: Rs 56.00   P/E: 8.55xBSE Code: 506690     FV: Rs 5   52 Week H/L: Rs 507.30/188.80  CMP: Rs 473.00UNICHEM LABORATORIES Market Cap: Rs 1,705 cr   TTM EPS: Rs 37.15   P/E: 12.75xBSE Code:532505     FV: Rs 10   52 Week H/L: Rs 83.50/36  CMP: Rs 80.50.