Sachin Abhyankar of Motilal Securities picks two midcap stocks, which according to him will have a good future. He likes Enkei Castalloy and Sarla Polyester.
Enkei Castalloy
It is 40% subsidiary of a Japanese company called Enkei Corporation, which is a world leader in alloy wheels.
This company manufactures manifolds and cylinder heads. Manifolds are required 100% for Maruti Udyog and cylinder heads are required for Hero Honda and Bajaj Auto. The company has ventured into India for alloy wheels, which is supplied to Honda.
So if one believes the 14% growth story for two wheelers or the 13% growth story for four wheelers, then more and more alloy wheels will definitely be required and this company is a very good defensive bet, we definitely like it.
On how numbers and valuations stack up for this company:
This company has been growing at a pretty fast pace. We believe that future growth for the company is in line with the growth expansions by Hero Honda and Bajaj. Basically, it all amounts to the tapping of the European markets for alloy wheels.
We see this company growing from around Rs 122 crore (Rs 1.22 billion) of sales to around Rs 350 crore (Rs 3.50 billion) of sales in the next two years. We see profit after tax growing from Rs 8 crore (Rs 80 million) in the current year 2006 to around Rs 24 crore (Rs 240 million) by 2008, and it is a good 80% CAGR growth for the company in the next two years.
On his concerns for this company:
There could be a basic slowdown in the two-wheeler and four wheeler sector due to the price hikes or the way oil is behaving. Second, this company uses aluminium as a raw material, which is more than 45% of their total input. But, I believe that this aluminium aspect is certainly passed on to the consumers. However, any slowdown in the two wheeler or four wheeler industry can impact margins.
Disclosure: Our firm holds a sizable stake in this company.
Sarla Polyester
It is one of the highly specialised yarn making companies and it's really moving up the value chain into high tenacity yarn. The earlier yarn, which the company made was used for hosiery material, where we require elastics and high tenacity materials. The company is exporting the new high tenacity yarn to a lot of companies like Coats of China, etc.
That's basically required for swimming suits, seat belts and other high-end value materials. So this company has been moving up the value chain. Margins are definitely good. ROEs are more than 30% plus for the last two years and we see this sustaining going forward for the next two-three years.
On financials and valuations:
It's not too great as far as the topline is concerned because these are highly niche products. Margins are definitely better, so we expect a topline of around Rs 85 crore (Rs 850 million) for the current year and Rs 100 crore (Rs 1 billion) plus for the next year.
But we see a significant margin improvement; we see a margin of 22% on the operating front for the current year, which should jump by 300 basis points for the next year. We see an EPS of Rs 17 for the current year and Rs 24-Rs 25 for the next year.
On why Sarla Polyester is not enjoying valuations from the market, which they should:
As far as Sarla Polyester is concerned, the discounting is low because of lack of a great topline. People are very much obsessed by topline and most don't look at the ROE's and the kind of EPS and dividend payout that the company is doing. These are the two basic things, which we feel are the negatives for the company.
Disclosure: We hold positions in Sarla Polyester.