Dalal Street Investments

MidCap Companies for Investment

November 21, 2009

Midcap Stocks IndiaThis is the Last series of the 3 part post on MidCap Companies in India. Read Part – 1 [Aurbindo Pharma, BGR, IRB Infra, IVRCL, Everonn Systems] and Part -2 [Infotech Enterprise, Koutons Retail, Mahindra Holidays, Shiv Vani Oil & Gas] . All these have to be invested with a time horizon of 2 years according to Edelweiss.

South India Bank:
South Indian Bank’s (SIB) advances book is set to post a robust 22% CAGR over FY09-11E after having slowed down the pace of growth in FY09. SIB has a niche franchisee with nearly ~42% of total deposits comprising low-cost deposits; 24% current account and savings account (CASA) deposits, and a stable ~18% non-resident external (NRE) term deposits (where the bank pays close to 3%).SIB has one of the stronger asset quality portfolios with gross NPAs at 1.6% and net NPAs at 0.4%. SIB is one of the most attractive banks in the mid cap banking space. The stock is trading at 0.9 FY11E adjusted book and 5.4x FY11E earnings.

Techno Electric and Engineering:
India is expected to add ~60,000 MW of generation capacity in the Eleventh Plan, which is more than what was added in the past 15 years. TEE has been one of the key EPC (equipment, procurement, and construction) contractors for Power Grid Corporation of India (PGCI) for air insulated sub stations. At FY09 end, TEE had a gross block of INR 100 mn, implying a fixed asset turnover of ~101x. Even in the mid-1990’s down cycle, the company did not report a single year of loss, which we believe is an important indicator of a well managed company. At INR 150, the stock is trading at a P/E of ~9.9x and ~7.7x for FY10E [EPS 15] and FY11E [EPS 20], respectively.

TIL – Tractors India Ltd:
TIL provides total infrastructure solutions rather than supplying only products.Infrastructure development is a priority for the Government of India (GoI) for sustained GDP growth. ~12% of this spending is likely on equipment like cranes, forklifts, and material handling systems, translating into an opportunity of INR 72 bn over the next five years. TIL’ order book is of INR 2.61 bn. At CMP of INR 303, TIL is trading at 6.9x its FY10E consolidated EPS of INR 43.9 and 5.4x its FY11E EPS of INR 55.6.

TRF’s primary business is – engineered equipment,coal beneficiation systems, coal dust injection, systems and coke oven equipment for steel plants, bulk material handling systems and equipment, , and port and yard equipment. TRF has an order book of 14 bn and is focusing on bagging more orders from Ultra Mega Power Projects. Edelweiss Analyst assumes 20% market share for TRF, it means incremental revenues of INR 8 bn over the next five years. At CMP of INR 600, TRF is trading at 11.6x FY10E consolidated EPS of INR 51.8 and 9.1x our FY11E consolidated EPS of INR 65.9.

Usha Martin:
Usha Martin (UML) has recently completed its blooming and section mill of 275 kt and wire rod mill expansion to 400 ktpa, as a part of its ongoing expansion plan.UML offers a variety of products in the wire rope segment. It is India’s largest manufacturer of steel wire ropes. Assuming billet production of 395 ktpa and 575 ktpa in FY10E and FY11E, respectively. Assuming 4.8x EV/EBITDA, our fair valuation works out to INR 86/share (CMP is INR 72)

Welspun Gujarat Stahl Rohren:
Gradual increase in crude and gas prices (improving project economics) and better economic recovery outlook and liquidity are likely to improve the outlook for global pipeline capital spending. Has higher order book at INR 78.0 bn (Q2FY10 end) from INR 68.3 bn as on June 2009 end. Valuing the stock on both comparative (P/E and EV/EBITDA) and DCF valuation methods, yielding an average fair target value (March 2011) of INR 379/share. EPS Growth is expected to be 38 for FY10 and Rs 40 [yes flat growth] for FY11.

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