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MidCap Stock Picks -1

November 19, 2009

Edelweiss has some favorite picks in the MidCap space where it expects an improvement in top line to drive strong EBITDA growth as revenue growth outpaces costs. Stocks with high degree of operating leverage. Edelweiss’ conviction is that these stocks have a high probability of surprising on the upside over the next 1-3 years.

This is Part 1 of the Coverage and here are the stocks and brief excerpts / justification them being picked up.

AUROBINDO PHARMA:
Strategic alliance with Pfizer (PFE) for 80 products and 218 SKUs across multiple markets adds strategic depth and long-term value. Regulated sales are likely to post 38% CAGR in FY09-11E, to INR 13 bn, as ARBP is poised to benefit from current scale of filings. Expect an EPS of Rs 90 and 118 for FY10 & FY11. Maintain BUY recommendation on the stock and rate it Sector Outperformer on relative return basis.

BGR Energy:
Power capacity addition to drive orders growth. BGR’s FY09 order intake jumped 3.5x on two large EPC jobs worth INR 80 bn (Kalisindh and Mettur). Even as the macro environment looks uncertain, the management has bid for INR 50 bn worth projects on BOP basis. Besides engineering and technology skill sets, EPC and BoP contracts tend to be project management intensive. Expect an EPS of Rs 22 and 33 for FY10 & FY11. Maintain BUY with Sector Outperformer rating.

Everonn Systems / Education:
Everonn is the third largest player in ICT in the schools business, following Educomp and NIIT. Currently, the company has implemented ICT projects in 4,442 schools, which contribute 33% to overall revenues. Estimate a consolidated topline CAGR of 47% and net profit CAGR of 68%, over FY10-11E. Expect an EPS of Rs 27 and 41 for FY10 & FY11.

IRB Infrastructure:
IRB Infrastructure (IRB) is a pioneer in the BOT road segment in India with presence in the space since 1995. The company’s strategy revolves around sound planning and then following it up with aggressive decision making. Its EPC arm has industry leading margins and return ratios and ~ INR 99 bn order book, which will help EPC revenues grow four-fold between FY09 and FY11E. Expect an EPS of Rs 10.5 and 13 for FY10 & FY11.

IVRCL Infrastructure:
IVRCL Infrastructure’s (IVRCL) business strategy is marked by its dominance in the water segment, which contributes the bulk of its order book. IVRCL has four BOT projects a water desalination plant and three road projects. Sum-of-the-parts-based target price for the stock is INR 482, with EPC projects contributing INR 376 to valuations. At CMP of INR 400, for fully diluted EPS estimate of INR 18.4 and INR 23.5, IVRCL is trading at a P/E of 21.8x and 17.0x for FY10E and FY11E, respectively

Stay Tuned for 10 more MiCap stores from Edelweiss. Do you agree with their recommendations ? What say ?

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