Six Midcaps worth Investing

Midcaps have been battered down in the last one year which gives investors an oppurtunities to buy stocks at attractive valuations. Below are the stocks with good management, strong earnings growth, superior return on equity and adequately funded for the growth available at reasonable valuations.

Everest Kanto Cylinder (CMP: 171)

EKC is the largest domestic manufacturer of high pressure gas cylinders used for the storage of industrial gases and CNG. The company currently has four manufacturing plants (Aurangabad, Gandhidham, Tarapur and Dubai) that have a total production capacity of 806000 cylinders per year. An aggressive expansion plan, including a greenfield plant in China and new plant in SEZ would increase EKC’s capacity to 2.3mn cylinders over the next four-five years. EKC should grow at a EPS CAGR of 45%+ over the next two years with EBITDA margin of 28-30% and ROE of around 35%.

Risks: Crude price @ $40/bbl which could impact CNG’s strong economics and consequently slow CNG penetration.

Future Capital (CMP: 156)

FCH is a focused alternate investment advisor with $1.5bn AUM in consumption related sectors and plans to grow its AUM to $5bn by FY11. It has exclusive rights to offer financial products (loans, third party distribution of insurance, credit cards and mutual funds) at Future Group outlets. FCH benefits from a declining interest rates scenario. FCH has one of the best management. Its a niche business model.

Risks: Might face some problem in raising capital this year but things should be better next year. Also, no exit option till capital markets improve.

Jain Irrigation (CMP: 346)

Jain Irrigation makes irrigation and piping products, plastic sheets, tissue culture planting material and processed food and vegetables. The firm has a 40% market share in total exports of dehydrated onions from India. The company had an order book of more than Rs 600crs as on Sept’08. Only 3mn hectares of irrigated area is under micro irrigation compared to a total irrigated area of 69mn hectares. The govt. emphasis on increasing micro irrigation bodes well for the company. The company has expansion plans of Rs 600crs spread over next three years. MIS business order flow to strenghten further with central govt. approving disbursals even in absence of disbursals by the state govt. Growth in international business will slow down.

Debt of Rs.16bn on the books. Margins would expand by 5-7% with favorable business mix and raisin prices. EPS is expected to grow over 35% in the next two years with ROE of around 25%. Its shareholders includes the likes of George Soros, Matthews India Fund, Rel MF and Arisaig Partners.

Risks: 7.5mn warrants issued to promoters are due for conversion in May’09 at Rs 478/share. Possibility of conversion is 50:50.

Shriram Transport Finance (CMP: 195)

STFC is the largest asset financing NBFC with AUM of over Rs 225.5bn. The company is a leader in organized financing of pre-owned trucks with strategic presence in 5-12 years old truck and a market share of 20-25%. It has a pan-India presence with 462 branches and employs 12619 employees. The company has built a strong customer base of over 0.6mn. Over the past 29 years, it has developed strong competencies in the areas of loan origination, valuation of preowned trucks and collection. It has a vertically integrated business model and offers a number of products which include: Pre-owned CV financing, New CV financing and other loans like accidental repair loans, tyre loans and working capital finance, etc. The company is supported by strong institutional investors like TPG New Bridge, Chrys Capital, Tiger Global, Blue Ridge, Citicorp and Axis Bank providing it growth capital support.

STFC helps private and foreign banks meet their priority sector lending by selling down the loans originated by it. Every year the company sells around Rs 2500crs of its loans to these banks. Basically, securitization of loans.

AUM is expected to grow to Rs 30,000crs by 2010.
Net NPAs – 0.91% in Q2FY09 from 0.88% in Q1. Could increase to 1.2% by the end of FY09 and 1.4% by FY10 as economy growth picks up in H2FY10.
Book Value – Rs 104.67 (Rs 150 expected by FY10)
Net Interest Margin – 7.71% in Q2 v/s 7.38% in Q1
ROE – 32.38% (Q2) v/s 30.41% (Q1)
ROA – 3.36% (Q2) v/s 3.16 (Q1)
 
Risks: Promoters not exercising conversion of warrants into equity shares by May’09 since conversion price is 300 which is 50% above CMP. This will result in company non infusion of Rs 216crs. I personally feel it would be exercised. GDP contraction more than anticipated.
Opto Circuits (CMP: 90)
OCIL is a leading manufacturer & supplier of electronic medical equipments. OCIL is a manufacturer and exporter of invasive and non-invasive medical equipment & supplies wide range of electronic devices and patient monitoring products in the healthcare segment. OCIL’s topline is contributed by 75% non-invasive products and 25% by invasive products. OCIL’s product portfolio includes digital thermometers, sensors, probes, pulse oxymeters, patient monitoring systems. OCIL derives 95% of its revenues from overseas markets, of which 70% comes from OEM’s. Invasive segment is expected to grow at 100% over the next few years. The global stent market is estimated at $12bn and growing at around 12% annually. Non-invasive segment will grow by new product launches. With the acquisition of EuroCor in Germany and Criticare in US, OCIL has got tremendous advantage to cater to new geographies with its diversified product basket and penetrate the existing markets, which leave enough scope for growth amid global slowdown.
EPS is expected to grow at over 45% for the next two years with EBIDTA margin over 30% and ROE of around 43%. Debt is Rs 2bn. OCIL has a track record 7 consecutive yearly bonuses.
Sintex Industries (CMP: Rs 145)
Sintex is India’s largest manufacturer of a range of plastic applications. With a well diversified portfolio and very limited competition in place, it stands a market leader in the Indian plastics processing industry as well as its expertise in the niche segment of corduroy fabrics and men’s structured shirting for premium brands add to its sheen. It manufactures a range of plastics at its 9 manufacturing plants across the country which includes prefabricated structures, industrial custom moulding products, monolitic construction, FRP products and water storage tanks. It has a market share of about 70% in overhead water tanks, 80% in specialized industrial tanks, and more than 60% of pre-fabricated structures.
Over 75% of revenues comes from plastics while the remaining comes from construction and textiles. Exports share will rise to 40% in FY10 compared to 27% in FY08. Sintex has an order book of Rs 15bn to be executed by end of FY10 in its monolithic business. The company is sitting on Rs 1700crs cash to be used for capex and acquisitions. EPS is expected to grow at a CAGR of 40% over the next two years (assuming no FCCB conversion) with ROE of 20% and EBITDA margin of around 18%.
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