Niche Picks

Companies with unique business models are typically rewarding investments.

There are two kinds of businesses. The first one fights tooth-and-nail in trying out to be the next big thing in an already crowded universe of businesses. The second kind attempts something different and tries to succeed.

Some of these niche players aim for leadership even if it is a small industry segment. These companies demonstrate a strong growth both in their top lines as well as profitability, as their niche grows in size. Some niches grow large enough to support more than one player.

Consequently, the stocks of these companies earn fabulous returns and their valuation commands a scarcity premium. Although we came across quite a few companies which operate in market niches that are unparalleled, here are some interesting ones.

Some of these companies have a first-mover advantage, which prohibits competitors from entering their specific niche. In a few cases, certain technological capability may give them an edge.

In others, it is simply the business model that works favourably. Hence, we look at those companies which have a combination of a product or a service to offer that has a market different from the run-of-the-mill players in the industry. Read on.

No bar
A first-mover in the radio frequency identification (RFID) solutions and smart cards markets, Bartronics is the largest smart card manufacturer in India with a capacity of producing 80 million smart cards a year.

Add to this, it also provides a range of solutions comprising of the hardware and software required to automate inventory management and tracking for its various types of clients, which include retail chains, warehouses, manufacturing companies and the like.

Bartronics has reported increasingly strong numbers year after year, and maintained high profitability. “We are looking at an overall target (top line) of around Rs 200 crore for the current financial year,” says Sudhir Rao, MD, Bartronics.

At around Rs 255, the stock trades at nearly 19 times and 11 times estimated FY08 and FY09 earnings which is not expensive, even after the recent rally in the stock. For starters, the stock has earned 40 per cent over the past month.

Tried and tested
First, it was packaging research that brought Bilcare into limelight, and now its foray in clinical trials and related services to big pharma, which puts the company on a high growth trajectory.

Bilcare is also considering inorganic growth. “We are looking at technology and R&D focussed pharma outfits for potential acquisitions,” says Vineet Mehrotra, CFO, Bilcare.

Over the past three fiscals, Bilcare’s revenues have grown at over 50 per cent y-o-y. Going forward, the clinical services vertical which contributes nearly 20 per cent to the top line at present is expected to account for half of FY11 revenues.

Bilcare’s operating margins are decent at 28 per cent. Add to this, its new clinical research training venture, Bilcare Academy, is a cash rich business.

At 21 times estimated FY08 earnings and 17 times estimated FY09 earnings, there appears to be room for an upside, if one factors in the potential of the training business.

Action ahead
The only listed player and an early mover in the direct-to-home arena, Dish TV has already made a strong foothold with 2.1 million subscribers so far.

Even though the company is yet to break even since it is investing heavily in acquiring subscribers, the large subscriber base will give it an edge once the competition steps up. The industry is likely to witness entrants like Bharti, Sun Astro and Reliance ADAG.

At present, Dish TV has a market share of 75 per cent. With the market expanding rapidly, the growth is not likely to dampen.

Further, Dish TV already has an established 400 strong distributor network and nearly 35,000 dealers across India, keeping it on top of the pack.

Considering the current demand scenario, analysts estimate the company to turn profitable by FY10, and expect the subscriber base to grow at a compounded annual growth rate of over 25 per cent by FY12.

Despite the gestation period involved, the annuity nature of business coupled with a large customer base makes a good case of strong cash flows. At present, the stock is trading not too far from its 52-week low of Rs 69.40. Looks like it’s time to enter the counter.

Ride the learning curve
One of the rare educational content creation and delivery players listed on the bourses, Educomp Solutions boasts a strong order book for its online education solutions.

During FY07, Educomp signed on 2,819 government schools as compared to 613 a year earlier. For the first quarter of FY08, it added 2,800 more schools.

With this high-paced client acquisition, low capital expenditure, Educomp’s profitability is likely to expand dramatically this year.

The company is expected to continue to raise the bar as it comes up with newer service offerings and initiatives to leverage its capabilities further.

And that is the reason it trades at an expensive multiple of 90 times estimated FY08 earnings. Educomp is no longer a lone star on the bourses; the recently listed Everonn Systems is in the same business.

Fire and dry ice
Nitin Fire Protection, a leading player in fire protection, safety, security and intelligent building management systems has interests in high pressure cylinders, fire extinguishers and fuel dispensers.

Since the demand for each of its products is growing exponentially, the company has been in an expansion mode, which went on-stream recently.

Analysts estimate its revenues to grow at 90 per cent a year till FY09, while net profit growth will be faster at 120 per cent.

At Rs 457, the stock trades at 20 and 11 times estimated FY08 and FY09 earnings respectively. Compare this with another promising pick, Everest Kanto Cylinder, which trades at a discount to Nitin Fire, mostly due to its less diverse business mix.

Airport power
So far a diversified infrastructure player across sectors such as power, roads and airports, GMR Infrastructure seems to have found its comfort zone in airports. It already has the Hyderabad and New Delhi airports up its sleeve, and recently, it won a contract to develop one at Istanbul, Turkey.

It has strong operational partnerships with Malaysia Airports, Germany’s Fraport AG and Turkey’s Limak for its airport forays.

Compared to its other build-operate-transfer (BOT) projects, airports are usually a high return business. Again, in its BOT projects, even though the upfront capital expenditure is huge, the returns are spread over a longer horizon.

Although valuations appear expensive, the stock has slid significantly from its 52-week high of Rs 1005 to Rs 768. One may enter at dips.

Cultivating profits
Micro-irrigation, a relatively unheard of segment, is set to grow leaps and bounds due to the renewed impetus on agriculture in the country. Jain Irrigation is the only listed player focused on drip irrigation systems.

To spread its presence, the company acquired a 50 per cent stake in NaanDan of Israel, the world’s fifth largest micro-irrigation company. It also has a presence in food processing and exports.

At around 20 times estimated FY08 earnings and 16 times estimated FY09 earnings, the stock is valued reasonably, given the company’s prospects of growing at a compounded 40 per cent annually over the next three years.

Shining arrays
One of the few players in the light emitting diode (LED) business globally, and the only listed player in India, Mic Electronics is looking at a huge market of LED lighting for billboards and video walls for advertising, signalling systems and industrial lighting.

Mic has an order book of Rs 150 crore as on June 2007 and is now investing Rs 75 crore in capacity expansion as well as marketing from the money it raised via its IPO.

Robust financials promise an earning per share of an estimated Rs 26 in FY08, and Rs 35 in FY09, which results into fairly low price-earning multiples of 22 and 16, respectively.

Optical zoom
Opto Circuits makes medical devices such as sensors and pulse oximeters, and products for non-invasive surgery such as catheters and stents, used in procedures such as angioplasty.

Since the products are innovative, the segment poses significant entry barriers for new players. Again, the company’s cost efficiencies allow it to earn an operating profit margin of almost 30 per cent consistently.

The company has a track record of rapid inorganic growth across geographies. Growing demand for its products make Opto Circuits attractive irrespective of its price-earnings multiple based valuation.

Further, there is hardly any comparable benchmark. Since the company is taking off from a small base, there still remains ample headroom.

Z-security
Zicom Electronic is another one-of-a-kind pick which is engaged in security products such as close circuit televisions (CCTVs), alarms and monitoring and surveillance systems for home, commercial and industrial use.

Although the company created no buzz for a long time, recently it announced its plan to open 180 exclusive retail outlets across the country over the coming two-three years.

A retail foray, imminent product launches and the planned expansion abroad are likely to be the growth drivers for the company. At nearly 24 and 21 times estimated FY08 and FY09 earnings, the stock may appear expensive, but one may enter at declines.