20 best mid cap stocks

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The real test of success of a listed enterprise is the rise in its market capitalisation over a period of time. Companies start small and gradually ride their success to become larger over a period of time. As a natural progression, mid-cap companies with proper managements and sustainable growth potential are often considered as ‘blue chip companies in the making’.

There are many mid-cap companies that make efforts in that direction. The determination to win, the craving to succeed and the urge to achieve their full potential are the keys that unlock the doors of excellence for these mid-cap companies.  However, despite these factors and the BSE Mid-Cap Index contributing to more than 15 per cent of the overall market capitalisation on the BSE, mid- cap stocks get less analyst coverage and are also not provided a good weightage in portfolios.

This has resulted in some good mid-cap counters being ignored by investors despite their potential of being capable of transformation into larger ones. Taking this into consideration, we had started recommending a bunch of mid-cap companies in 2009 (Issue No 16 dated July 20-August 2, 2009).

Looking at the success of our first attempt (average portfolio returns of 48.10% against Sensex returns of 28.73%), we made it an annual feature and repeated a similar exercise in 2010 also (Issue No 16 dated July 19-August 1, 2010). But unlike the first attempt, the success rate was not good here and the overall portfolio declined by 9%, while during the same period the BSE Mid-Cap Index declined by 6.2% (see table: Performance of 25 Mid-Cap Value Picks 2010).  While there were some counters like UCO Bank, SRF and SKF India providing strong returns, there were counters like Allied Digital and Jyoti Structure resulting in the erosion of value. Both the companies performed poorly on the financial front quarter after quarter.

But while the overall performance seemed to be poor, it was not the same story all the way. Immediately after the recommendations a majority of the counters gained significantly, providing good opportunities to book profit at a higher level. Counters like Allied Digital (Rs 265), Zylog Systems (Rs 612), IFCI (Rs 80.50), BEML (Rs 1,238) and Jagran Prakashan (Rs 148) are some of those that had moved upwards to touch their 52-week highs immediately after the recommendations, but are now quoting below the recommended price due to bad market conditions, incur ring losses.

So it is not the case that the recommendations were bad but moreof not timing the exit properly. Once again, this year we are recommending 20 mid-cap counters for the choppy markets. We have put in our experience over the last two years to come up with a winning strategy for our readers.[PAGE BREAK]

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Selection Strategy

But first let us understand what a mid-cap counter means. We classify it as a company which has a market capitalisation of more than Rs 750 crore but less than Rs 5,000 crore. As stated above, mid-cap companies need a careful selection strategy and that is what we have done. We have chosen only those companies that have posted continuous growth in the bottomline on a Q-o-Q basis for the preceding two quarters considering the December 2010 or March 2011 (the most recent in terms of data availability) quarter as the latest quarters.

Further there have been some companies which have posted better 9MFY11 bottomline performances as compared to FY10 as a whole. The idea behind this is that it clearly shows that the company is growing. Further, we have followed a very strict criterion on the liquidity of the scrip on the bourse so that investors get a proper entry and exit. The yearly financial performance and the business model have also been considered before recommending the stocks to our investors.

Therefore, in a nut shell, we have taken efforts to recommend a stock with a utmost caution and hand-picked the mid-cap counters so that our readers can make money. Our 20 companies are a good mix of representatives of banks, fertilisers, FMCG, infra, automobile ancillaries and engineering stocks. We suggest that investors should go for scrips with a long-term outlook and one can expect a 15- 20 per cent appreciation in a one year time frame.

Abbott India

The most important factor that goes into recommending Abbott India is the defensive nature of the pharmaceutical sector. Next is the strong dividend track-record of the company, where it has consistently and handsomely rewarded its share-holders for the past 21 years. Even the current dividend yield (ex dividend) of more than one per cent seems to be good. The MNC parentage is an added advantage with the parent company also posting a strong performance globally.

On the valuation front, the trailing four-quarter earnings discount the CMP of Rs 1571 by 30.95x. But this is a short-term impact on account of the recent acquisitions and steps taken by the company. The results of the current efforts will be seen in the long term. [PAGE BREAK]

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Bajaj Finance

Bajaj Finance is in the business of financing small-scale businesses, providing loans against properties, loans against securities and construction equipment. It has posted a strong financial performance in the past two fiscals. Going ahead, it is expected to show a strong growth in the construction equipment financing business and small business loans.

In Q3FY11 it posted a strong growth in these two segments and is expected to continue doing so going ahead. Its customer acquisitions have been very aggressive in these two segments. Another boost may come from the news that the well capitalised NBFCs may get a banking licence. With CAR of more than 21 per cent, it is already well capitalised. On the valuation front, the CMP of  Rs 640 discounts its TTM earnings by 11.66x and the price to book stands at 2.27x.

Arvind

Arvind is one of the largest fabric producers in India with a capacity to produce 200 million metres of fabric a year. With about 100 mn metres fabric capacity expansion getting operational in phases over FY2010-FY2013 and robust growth in its brands and retail business, the earnings are expected to grow at a rapid pace during FY12-13. Further, the additional benefit is the monetization of its 500 acres land bank which is expected to result in cash flows of nearly Rs 1000 crore over a four-year period, which would be used to fund the capex and retire a part of its debt. On the valuation front, the CMP of Rs 74.00 discounts its trailing four-quarter earnings by 20x. The EV/EBITDA also stands comfortable at 9.03x. We recommend a buy at current levels.

BASF India

Companies who consistently perform well and who have a good leadership are always sought after. One such counter is BASF India, which has been a consistent performer in the past 10 years. Its topline and bottomline have shown a consistent increase over this period. Apart from its consistent performance, BASF India is also a part of BASF Germany, which is the largest chemical company in the world. The parent company is considering India as a major growth area.

Apart from the factors mentioned above, the consistent dividend payment history of 21 years, debt-free status, its plans to expand capacity and strong management bandwidth make the company further lucrative. On the valuation front, the scrip discounts its trailing four-quarter earnings by 18.95x. Even the EV/EBITDA of 10.80x seems to be placed well against its peers.[PAGE BREAK]

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Bayer Crop Science

Bayer Crop Science (BCSL) is one of the world’s leading innovative crop science companies in the areas of crop protection, non-agricultural pest control, seeds and traits. The company derives nearly 75 per cent of its export revenue from Bayer AG’s group companies due to the cost advantages that it offers. Going ahead, new product launches, outsourcing from the parent company and a low pesticide penetration will drive the future growth of the company. Further, with the government focusing on agricultural growth, fertiliser and crop protection companies are expected to do well. BCSL is also planning a sustainable production of high quality gherkins in India. This is likely to add strength to its growth. On the valuation front, the CMP of `873 discounts its trailing four-quarter earnings by 26.76x.

Educomp Solutions

|Investors can buy the shares of Educomp Solutions, an educational solutions provider, considering a revenue model that ensures sustainable revenue streams and the rapid addition in the number of schools that adopt its products and services. At Rs 441, the share trades at 16.83 times its 2011E earnings. At these levels, the valuations seem attractive due to the superior growth and margin expansion that the company has been able to achieve in its key school learning solutions business. These valuations are also at a substantial discount to historic valuations enjoyed by the stock. Both the segments, viz smart learning solutions (75 per cent of revenues) and ICT solutions, are doing well with good growth witnessed in 9MFY11. In view of the factors mentiond above, we recommend a buy at current levels.

Chambal Fertilisers & Chemicals

Chambal Fertilisers & Chemicals (CFCL) is one of the largest private sector fertiliser producers in India with a share of about 10 per cent in the domestic market. It has posted a very strong financial performance with its 9MFY11 profits already higher than its FY10 profits. CFCL is one of the largest private sector fertiliser producers in India. Its fertiliser business drives its growth and brings in 88 per cent of the total revenues.

With the monsoon expected to start in a few weeks from now, the demand for fertilisers is bound to go up in the coming period. On FY11 estimated PE of 11.26x, with a dividend yield of 2.26 per cent, it is worth a grab at CMP of Rs 83.[PAGE BREAK]

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Finolex Cables

There are two main factors for recommending this counter. First is the underutilised capacity and balancesheet strength, which will help fund growth. The second factor is a healthy topline growth as well as rising margins,which will lead to improved performance. The company currently operates at 50 per cent of its capacity across all its product lines. The unutilised capacity will enable FCL to take advantage of operating leverage when demand picks up. FCL has very little debt on the balance-sheet, leaving ample scope to leverage if demand picks up due to triggers like spending on 3G or the SEBs spending on power cable expansions. The company has always had a policy of increasing its dividend payout year after year. This is likely to continue for FY11 as well.

Geodesic

Investors can consider buying the stock in the light of the strong deals it has in place for its products, continuing traction in domestic deals and attractive valuations. At Rs 79, the share trades at just two times its FY12E per share earnings. During the troubled period in late 2008 and much of 2009, the company faced significant price erosion and client cutbacks on budgets. However, from FY-11, the growth trajectory is once again visible. In the first nine months of this fiscal, Geodesic’s revenues grew by 35.5 per cent over the previous year to `636.3 crore, while net profits expanded by 41 per cent to `251.9 crore. On the valuation front, the scrip is trading at just 2.22x. We recommend a buy on account of all these factors.

Jubilant Foodworks

Jubilant Foodworks has been a success in terms of its business model. On the valuation front, the company may look a little overpriced with a CMP of `680 discounting its trailing four-quarter earnings by 69.47x. However, the kind of growth that the company has managed to sustain over the last fiscal calls for it to deserve these valuations. For 9MFY11 the company posted a same-store sales growth of more than 35 per cent and for new stores the growth was more than 67 per cent. [PAGE BREAK]

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At present JFL has a network of 364 stores across India. In 9MFY11 it has added 58 stores and 12 more are expected to be added in Q4FY11. With strong same-store growth and a strong addition of new stores we expect good growth for the company going forward.

GNFC

The prices of the company’s key chemicals like nitric acid, formic acid and methanol, etc, have increased by 15-20 per cent, resulting into higher margins despite an increase in input cost. Further, the capex plan of the company is expected to drive its growth. GNFC’s aggressive capex  plan of Rs 4000 crore over the next two to three yeas is on track. Initiatives in the phase-1 capex with an estimated cost of `1200 crore was scheduled to go on stream by Q3FY11. The announcement of the same is expected soon. Further, phase-2 capex, with cost of `1600 crore to put up a TDI plant is expected to be completed by Q3FY12. Capex for phase-3 with a cost of `1200 crore to convert its ammonia plant from LSHS to gas-based is expected to be completed by Q3FY13.

Nagarjuna Fertilisers & Chemicals

Expectations of a better growth in the agricultural sector along with a good monsoon for 2012 are likely to be major growth drivers for fertiliser companies.Even the expected announcement of NBS is likely to make a positive impact on the company. The commissioning of the CDR plant of 450 metric tonnes per day of CO capacity and the completion of a revamp and de-bottlenecking of its projects, has increased its production by about two lakh metric tonnes per annum. All the necessary arrangements for additional gas have been tied up by the company. On the valuation front, the scrip discounts its trailing four-quarter earnings by 11.13x and EV/EBITDA stands at 3.22x.

Rallis India

We have been quite bullish on the agro sector and hence have recommended a few fertiliser and crop protection companies. Rallis is another counter in the list and there are various factors behind recommending it. Leveraging its strong distribution network, Rallis is expected to derive benefits from its recent acquisition of Metahelix (seed company), thus capturing a larger share of the Indian agri-input pie. We expect added revenues from the seed business to start flowing in from Q1FY12. Commissioning of the Dahej plant by Q4FY11 is expected to drive revenues further from Q1FY12. Its new initiative with Tata Chemicals to sell pulses under the brand of I-Shakti will further boost the company’s revenues and profitability in the near future. We recommend a buy at current levels. [PAGE BREAK]

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Shoppers Stop

Shoppers Stop is one of the leading retail chains and the strong financial performance of the company for 9MFY11 is the major factor behind recommending this counter. The company posted a topline of `1256 crore and a bottomline of `55.26 crore, which is already higher than FY10 earnings. Another factor is the significant improvement in the margins by more than 150 basis points. With the improvement in the margins the company is expected to put in better performance in Q4FY11 and is likely to continue the momentum in FY12 also. On the valuation front, the scrip is trading at 40.79x and the EV/ EBITDA stands at 20.79x.

Sadbhav Engineering

Sadbhav Engineering registered a robust Q4FY11 by clocking revenue growth of 129 per cent YoY at Rs 1050 crore (highest ever quarterly rate) driven mainly by the enhanced execution pace across its own in-house road projects. For FY11, the company registered an impressive revenue growth of 75.8 per cent YoY to Rs 2210 crore. The net profit for the fiscal increased sharply by 122 per cent YoY to `20 crore, translating into a fully diluted EPS of Rs 8.There is a good order backlog of Rs 7000 crore and growth is expected to be good with this strong order pipeline. So the strong orders backlog gives good indication towards the revenue visibility. We recommend the investors to buy the scrip at current levels.

SREI Infrastructure Finance

Currently infrastructure growth is the main focus agenda of the Indian government and considering the same SREI Infrastructure Finance seems to be a good longterm bet. There are huge growth opportunities in infrastructure finance option as long-term funding is drying. SREI being a leader, growth is expected to be better. Although the infrastructure sector is currently on slow growth path, it is surely on the growth path.[PAGE BREAK]

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On the valuation front also, it is placed well with the CMP of `43.50 discounting the trailing four-quarter earnings by 14.65x. Even the EV/EBITDA of 7.95x seems to be placed well. The best part is the price to book of 2.40x, which seems to be much better than that of its peers.

SRF

The main reasons for recommending SRF are: the company is growing at a five-year CAGR of 22 per cent, there is a huge capex lined up, a 17-year dividend trackrecord, high dividend yield and an EV/EBITDA of a mere 7.61x. The three business segments contribute the following amount to the total revenue: technical textile business (50 per cent), chemicals and polymers business (34 per cent) and packaging film business (16 per cent). The company has an impressive plan for future growth, earmarking a capex of Rs 1400 crore for expansion and backward integration. It includes setting up a 14500 TPA polyester yarn at a cost of `184 crore and Rs 257 crore towards capacity enhancement. Further, it is investing Rs 40 crore for a dipping tyre cord plant, `92 crore for a wind power project and `60 crore for

Tamil Nadu News Prints and Paper

In choppy markets the first important factor is safety. Considering the same we are recommending Tamil Nadu News Prints and Papers, which has been a consistently dividend paying company since 1992. The current dividend yield stands at 3.20 per cent (ex dividend). With the company slated to announce the FY11 results shortly, one can expect a good dividend from the company this year too. Furthermore, being a public sector unit, there will be a safety factor associated with it. On the valuation front, the CMP of `134 discounts its trailing four-quarter earnings by 4.94x and the EV/EBITDA stands at 6.44x. We recommend that investors buy the scrip at current levels.

Sundram Fasteners

Sundram Fasteners manufactures products like high tensile fasteners, cold extruded parts, powder metal parts,radiator caps, gear shifters, oil pumps, fuel pumps and other engine components. The volume growth in the automobile sector is likely to be good and hence we expect SFL to put up a better show going forward. While this is the scenario on the domestic front, the export market is also likely to contribute higher amount to the topline. In past years the export sales were not good,but are likely to pick up with the overall global economy recovering. On the valuation front, the scrip discounts its trailing four-quarter earnings by 12.19x and its EV/EBITDA stands at 7.61x.[PAGE BREAK]

United Bank of India

United Bank of India has posted a strong performance in FY11 where its bottomline improved to `523.97 crore from `322.36 crore in FY10. Strong growth in advances (up 26 per cent to `53934 crore) and deposits (up 14.20 per cent to `77845 crore) in FY11 helped the bank shape its balance-sheet. The bank has a strong network of 1597 branches and additional 70 are expected to open in FY12. The low cost CASA deposits (currently 40 per cent) are likely to improve further on account of new branch openings. The asset quality improved with net NPAs declining to 1.42 per cent from 1.84 per cent in FY10. The ban is well capitalised with CAR standing at 13.05 per cent. Even the NIM improved to 3.19 per cent up from 2.24 per cent in FY10. It is in view of the factors mentioned above that we recommend a buy.