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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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