Vasudeo Joshi, Head of Research of Man Financial, states his favourite picks from the midcap space.
Joshi says that Ess Dee Aluminium is expanding capacities to 18,000 tons and is set to move into the FMCG space. He adds that Ess Dee Aluminium is looking cheap at the current levels and it is a high working capital business.
Joshi comments that YES Bank is expensive at this point in time and it will expand to more than 200 branches in next four years. YES Bank valuations are expensive but the growth is very strong, states Joshi.
Excerpts from CNBC-TV18's exclusive interview with Vasudeo Joshi:
Let's start with the space that is hated the most but you think presents an interesting buy, JK Cement?
Yes, partly because while we have downgraded the entire sector to neutral and along with that, JK Cement also, while the fact is that the stock is trading below the replacement value of about $60 EV/tonne compared to the replacement value of about $80/tonne.
We have to downgrade our earnings because of what has happened and the EPS we estimate for '08 is about Rs 25.6 and in '09 there could be a downside to this EPS to Rs 20 or below basically based on what price dynamics happens in the market and especially the capacities that come up.
So from this perspective, if you look from medium to long-term, 6-12 month period then obviously, the sentiment has got impacted. Even though the Q4 results maybe good for most of the cement companies, I think some sharp run up could be there but people will take a look form a long-term perspective.
So on JK Cement we have turned neutral as much as the rest of the sector. However fundamentally things are in line except the pricing and from a replacement value perspective, it looks a contrarian and an interesting idea.
What is the story for the small cap Ess Dee Aluminium?
It is a stock in packaging business, basically in the aluminium, aluminium foils and blister packaging, i.e aluminium and PVC and almost 90% of their customers are in domestic pharmaceutical companies.
They are also expanding their capacity to 18,000 tonnes, which was earlier 6,000-8,000 tonnes. They are also trying to enter the FMCG space and they have a strong supply to domestic pharma companies. The margins come in because of the draw down in terms of thickness that happens.
They manufacture foils of various layers from 3-7 layers used for packaging of most of the pharmaceutical capsules. The stock looks cheap at the current level although we have not initiated the coverage but we are likely to do that in a short span of time.
Overall, we like the story in terms of earnings growth, valuation and the niche business they are in but at the same time one should remember that in this particular business, there is not a great pricing power because it is a costplus business both for FMCG and Pharma because the buyers are extremely large corporations.
At the same time, on the raw material side, the raw material suppliers are bit multinational companies and so on that side there may not be much levy in terms of credit and so it's a highly working capital intensive business but at the same time with capacity expansion and existing client base looks an interesting story at this point in time.
From the newer space you like PFC - what do you like here?
PFC is a good story; their EPS for '07 is about Rs 8.5, for FY08 is about Rs 10. So at price to book adjusted it is trading at about 1.3 times and today 75% of their total loan book is to the SEBs (State Electricity Board) and 90% of that is in the escrow accounts. So in terms of SEBs efficiency of collection is improving and so the risk is minimal at this point in time.
At the same time, there is a nodal agency for 8 UMPP (Ultra Mega Power Projects) which will come up and for two projects they have already given the LOIs (Leter of Intent) and when they transfer these LOIs to SPVs, they will also get free income.
It is a direct play on infrastructure in the private sector and since they give long-term loans, which banks can give only to a certain extent i.e 15-20% of their total loan portfolios, it is a niche play, good management and the valuation is also not demanding and therefore it looks a good story. We will shortly initiate coverage on this stock.
The bank that you are showcasing today is YES Bank, how does that stack up compared to the other new generation private banks?
It stacks up at an expensive end at this point in time but one must realise that this is a relatively younger bank and its CA/SA ratio is close to 7% as far as the last quarter is concerned. If you see its branch network today, they are close to 25 branches as far as last quarter is concerned.
It is a story which is evolving and is a direct play on the corporate and the SME sector in India and they will go from 7% CA/SA to 18-20% in the next 3-4 years and will also expand their branches from 25 to more than 200 branches in the next 3-4 years.
Their fee business, that is non-fund based income is strong, 50% of their total income and it is only second to ICICI Bank although it is not a strict comparison in terms of scale but at the same time the proportion of trading income in the total non-fee based is very low. It is a story of good management and direct play on the SME sector over a period of time.
The valuations are expensive but the growth is also strong, the only thing is that the free float in this stock is limited, 90% of holding is in the hands of the promoters, FIIs and other NRIs entities. It is a fast growing midcap banking stock. We haven't rated the stock but will initiate coverage on it.
Disclosures: I personally do not hold any of these stocks but we are going to initiate coverage on them.
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