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9 stocks that hold big promise

By Atul Sathe
June 26, 2006 09:45 IST
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The meltdown since May 10 has knocked the bottom out of several mid-cap stocks. Three experts look ahead and tell us the stocks they are betting on.

A bear hug following the significant bull run has opened a window of opportunity in frontline stocks for investors.

Thus, even as the A group stocks may bag the limelight in the buyers' camp, there are several hidden jewels in the mid-cap segment that hold potential.

Although it could take six-eight months to generate buying interest in mid-caps, investors playing it for the medium to long-term, could cast their dice on this game.

Since May 10, when the markets started their southward journey, while the benchmark Nifty has fallen by 19 per cent, the CNX Midcap index has come down by 25 per cent.

Thus, several stocks in that segment are available at reasonable prices at the moment. It is important to pick the right ones among them. The Smart Investor presents nine mid-cap stocks that hold potential in the words of three experts.

These stocks have registered a significant fall that varies from 9 per cent to 42 per cent. They are: Man Industries (9 per cent), Era Constructions (42 per cent), Mahindra Ugine Steel (23 per cent), Venus Remedies (34 per cent), Asian Electronics (37 per cent), Lloyd Electric & Engineering (30 per cent), HEG (41 per cent), Subhash Projects (39 per cent) and BOC India (25 per cent).

Shrinath Mithanthaya of Motilal Oswal Securities

1. Man Industries

Man Industries is a major Saw (submerged arc welded)  pipe manufacturer with two plants at Anjar (Gujarat) and Pithampur (Madhya Pradesh). Saw pipes are used for cross-country transport of critical inputs, mainly oil and gas.

Over the next 3-4 years, global demand for Longitudinal Saw/Helical Saw pipelines is estimated at 2 lakh km, including 20,000 km in India.

Prospects for the company look good. It has an outstanding order book of Rs 1,250 crore of which Rs 850 crore are for exports and the rest for the domestic market. It has managed a Rs 400 crore export order to supply LSaw pipes and participated in bids amounting to about Rs 2,000 crore. It expects a success rate of around 20 per cent.

Prices of HR plates have not gone up much (about $750 per tonne X-65 grade) and the company has ensured availability for its entire requirements of plates to cover its existing orders.

Its new plant at Anjar commenced full-fledged commercial production in October 2005, benefits of which will accrue going forward. The stock is worth buying with a price target of Rs 250.

2. Era Constructions

Era Constructions India (ECIL) is a fast-growing mid-sized construction company and a beneficiary of large scale construction activity across sectors like roads, railways, ports, airports, power projects and commercial complexes.

ECIL is increasingly focussing on high margin industrial projects, where timely completion and delivery are critical.

ECIL has lined up several other growth drivers over the near and medium term like pre-engineered building materials, export of structural and allied designs and real estate development.

Group company, Era Metal Building Systems makes pre-engineered building material, which are used in non-residential projects such as industrial plants, railway stations and airports.

They form the core of the superstructure and are fabricated separately even as foundation work is going on at the site.

Thus, a project gets completed in half the time, six months instead of a year.

ECIL has also set up a 100 per cent EOU for structural and allied designs. Here it plans to undertake  designing assignments for exports.

To begin with, ECIL plans to tap the Middle East and the UK markets for its products. Contribution to revenues from this division in FY07 is likely to be about Rs 40 crore.

ECIL has a 12 per cent stake in Era Infrastructure. This company develops real estate and has about 400 acres of land. The promoters have a target of increasing the land bank to about 1,000 acres. ECIL also has a small stake in Era Financial Services, which plans to operate multiplexes.

In February 2006, ECIL concluded a GDR issue which has strengthened its net worth by Rs 190 crore to bid for big-ticket projects. The stock is recommended with a price target of Rs 400.

3. Mahindra Ugine Steel (Musco)

There are two main investment arguments for Musco. First, a transformation from a pure alloy steel company to a sheet metal stampings outfit and second, integration into Mahindra & Mahindra's (M&M) ancillarisation initiative MSat (Mahindra Systems & Automotive Technologies).

In FY06, Musco completed its merger with Pranay Sheetmetals (a stamping unit at Nashik), Valueline Hotels & Resorts and Console Estate & Investment.

Operating margins are up from 16 per cent in FY05 to 19 per cent in FY06 and net profit adjusted for extraordinary items is up 26.5 per cent. Following the merger, Musco issued about 15.5 lakh shares to shareholders of Pranay.

As a result, equity is up from Rs 30.93 crore to Rs 32.48 crore. Post preference dividend, EPS stands at Rs 18. For FY07, we expect an EPS of Rs 22. At the current price of Rs 104, the stock is trading at a P/E of 4.7x FY07E. Even the dividend yield is a healthy five per cent. We recommend the stock with a price target of Rs 200.

Amitabh Chakraborty of Brics PCG

4. Venus Remedies

This R&D company makes drugs to treat tumours. It has filed five international patents and six domestic patents. Its products, based on combination therapy in the cephalosporin space, have been successful. We are confident that the company will deliver 100 per cent CAGR in topline and bottomline till 2010.

The 100 per cent subsidiary in Germany is close to getting a German GMP certification that would be valid in EU, Japan and Latin American countries.

Exports generated about 17 per cent of the revenues in FY06 and it currently exports to about 13 countries, primarily to the CIS. We believe the company can become an outsourced manufacturing company for foreign multinationals by next year.

In our view, the current P/E of less than 6x FY07E earnings, does not adequately discount the future cash flow.

Venus posted good results for FY06. Sales increased by 170 per cent to Rs 92.1 crore, while net profit shot up by 311 per cent to Rs 8.4 crore. It has also tied up with three more domestic pharma companies, namely Wockhardt, Indoco Remedies and Alembic.

The management has given a guidance of a 50 per cent topline growth in FY07. We recommend a "buy" with a target price of Rs 693, almost 3x its current market price.

5. Asian Electronics

This energy saving company (Esco) manufactures lighting products that save energy. Asian Electronics (AEL) sells T5 retrofit and street lights.

Currently with more than a Rs 350 crore order book, the company will supply CFL lights to households in Maharashtra through MSEB for which payment will be collected on a monthly rental basis. We expect doubling of net profit in FY07 to over Rs 50 crore. The stock is available at less than 7x FY07E earnings.

The government has mandated establishments with power requirements above 500 KW to cut their energy bills by 30 per cent over the next three years and directed companies to install energy efficient equipment. 

The management is focussing on both organic and inorganic growth. It has taken over Raymolds Lighting which enjoys a significant market share in the retail malls segment in India. We recommend a "buy" with a target price of Rs 700 for the stock.

6. Lloyd Electric

The company manufactures heat exchanging coil for air-conditioners and has now gone into forward integration to manufacture air-conditioners for Samsung and LG from its Himachal and Uttaranchal plants. It has tied up with an Australian company to manufacture ACs for the Delhi Metro.

In addition, the company will manufacture heat exchanging coils for refrigerators for which technological knowhow will come from a Korean company in the frost-free segment. We believe that the stock has over 150 per cent appreciation potential.

The company has increased its capacity to assemble ACs to 2 lakh units per year in FY06. The company is utilising its Kala-Amb plant primarily for contract manufacturing and has customers like Samsung, Electrolux and Carrier.

It is setting up another manufacturing plant to assemble ACs, with 2 lakh units per year capacity in Dehradun. After commissioning of this plant, we expect revenues and profits to grow significantly, as this plant too will have excise and tax benefits. We recommend a "buy" with a target price of Rs 293.

Vikas Shah of Emkay Share and Stock Brokers

7. HEG

It is the world's fifth largest company in the graphite sector. The major demand driver for its graphite business is the increase in steel production through the electric furnace route, which accounts for 35 per cent of the total steel produced.

Demand from both, blast and electric furnace, is growing at 4-5 per cent globally per annum. The incremental demand is 40,000-50,000 tonnes and HEG, as well as its Indian peer, Graphite India, have expanded capacities to meet the same.

Moreover, the export prices this year are about 20-22 per cent more than the previous year. The growth in FY07 is expected to be high.

We expect the topline to touch Rs 850 crore in FY07 and the PAT is expected to reach Rs 107 crore. The first two quarters of the year should be good and we see a P/E of 5x on FY07E.

The company has ventured into the steel billets business and is integrating it with its sponge iron business. This has been a drag on the company's numbers. We recommend a "buy" with a target price of Rs 228.

8. Subhash Projects (SPML)

This mid-sized construction company has a Rs 2,300 crore order book, which is to be executed over the next 24-30 months.

The EBITDA for the industry is growing at 8-10 per cent, while it is a bit lower for this company at about 7.5 per cent. We see a P/E of 9x on FY07E earnings, while it is about 15-17x for its peers FY07E.

Moreover, the government has accelerated infrastructure spending in various sectors like power, airports, transmission & distribution, irrigation and water-related projects.

The BOT model is favoured for highway projects to encourage private sector participation. Total spending by the central government has improved to over $150 billion in the 10th plan from $90 billion in the 9th.

The company has key capabilities in executing water-related projects and electrical T&D projects for renovation & modernisation (R&M) of current power infrastructure and rural electrification (RE) projects.

The current order book is distributed between water-related projects including irrigation (63 per cent) and T&D projects (37 per cent). We recommend a "buy" with a target price of Rs 294.

9. BOC India

The Q4 numbers for this company, engaged in the manufacture of gas cylinders, were good. Moreover, it has recently signed a two-year gas supply contract with JSW Steel for supply of over 3,000 tonnes per day of gaseous oxygen, nitrogen and argon to meet the latter's demand for gases arising from the expansion of their steel making capacity at Bellary.

We expect a P/E of 10x on FY07E earnings, which is cheap considering its MNC credentials. With the takeover process of parent company--BOC Plc--by Linde AG in progress, an open offer is expected.

The focus on India in this business is increasing with the expansions happening in the steel sector. Investors with a long-term horizon of 2-3 years should hold on to the stock as the prospects of BOC India are good.

Short-term investors can exit if the open offer is priced between Rs 230-250. We recommend a "buy" on this stock as it holds potential.

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Atul Sathe
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