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Articles: Stock Market | Value mid-cap picks using the bottom-up approach
- Prof. 00782 Maverick
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Value mid-cap picks using the bottom-up approach
We have used the bottom-up approach for selecting our current top picks. We
begin with our summary arguments for each company, followed by a summary
table, and end with a note on each of them. The arguments for individual
companies (in alphabetic order) are:
ABG Shipyard: is benefitting from shutdowns in shipbuilding capacities
in the developed world and the latent maintenance/replacement market of
aging ships. Over the next 6-12 months, the company should start booking
orders for its upcoming, and a larger and more sophisticated, Dahej
shipyard; this has not been factored into our numbers.
Adlabs Films: Adlabs is a favourite due to its (a) integrated business
model, (b) dominant position in the processing segment, and (c)
aggressive expansion plans in the exhibition segment.
Clutch Auto: A dominant player in the domestic market, it is now
aggressively tapping international markets as well. We expect exports,
as a percentage of revenues, to rise to 40% in two years (from 25%). At
a P/E of 9.9X FY07E and an EPS CAGR (FY06-FY08E) of 32.8% , valuations
look compelling.
Glenmark Pharmaceuticals: The recent NCE out-licencing deal with Merck
adds an option value to the story. It also has four other NCEs likely to
enter clinical trials in the next six months, with further potential for
value-unlocking.
Marico: Unlike peers, it has been able to improve EBITDA margins through
strong brand presence, pricing power, and value-addition. Strong
free-cash flow generation gives it a war chest to grow inorganically as
well.
R Systems: is expected to post a 2-year EPS CAGR of 40.1%, driven by (a)
higher CY07E offshore revenue growth, and (b) benefits from economies of
scale. We have set a target price of Rs 268, based on a PEG of 0.29x and
PER of 11.7x CY07E earnings.
Sasken Communication: Rapid revenue growth and EBITDA margin expansion
will result in EPS growth of over 65% (FY06-08E CAGR). Thus, ROCE and
ROE should improve from 11.8% and 8.7% (FY06), to 19.9% and 19.6%
(FY08E), respectively. Acquisition of Botnia High Tech (Botnia) will
enhance Sasken's scale and size of operations further, enabling it to
target Tier I clients.
South Indian Bank: A change in the top management from June 2005 and a
pan-India focus gives it scope for re-rating. Besides, it currently
generates a dividend yield of about 3.6%.
Subex Azure: A global leader in software products for fraud management,
it acquired Azure in April 2006. With the Azure integration a quarter
ahead of schedule and good earnings visibility, it remains one of our
favourite stocks.
Welspun India: is the largest terry towel manufacturer in Asia. It
brings a combination of size, strong client base, and value addition.
|-------------+------+------|
| Company | Reco|Price*|
| | | (Rs)|
|-------------+------+------|
| ABG Shipyard| Buy| 218|
|-------------+------+------|
| Adlabs Films| Buy| 388|
|-------------+------+------|
|Clutch Auto | Buy| 123|
|-------------+------+------|
|Glenmark | Buy| 549|
|Pharma | | |
|-------------+------+------|
|Marico | Buy| 529|
|-------------+------+------|
|R Systems | Buy| 167|
|-------------+------+------|
|Sasken Comm | Buy| 481|
|-------------+------+------|
|South Indian | Buy| 76|
|Bank | | |
|-------------+------+------|
|Subex Azure | Buy| 637|
|-------------+------+------|
| Welspun | Buy| 88|
| India | | |
|-------------+------+------|
* as on 13th December, 2006
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