Attractive Midcap Stocks

By Sanjay Chhabria

Autoline Industries Ltd (Rs 128)

(BSE Code- 532797 NSE Code- AUTOIND)

(P/E- 7.6, Market Cap - 156 cr., FY10 Sales- Rs451 cr)




Autoline Industries (AIL) supplies complex sheet metal assemblies and sub-assemblies to Tata Motors, Bajaj Auto, Kinetic Engineering, Mahindra & Mahindra, Walker Exhaust and Fiat India. Tata Motors, which buys components for passenger cars and commercial vehicles, is Autoline's largest customer. AIL, which has five facilities in Pune, is a design engineering and manufacturing solutions provider focused on sheet metal assemblies and formed tubular products. AIL had come with an IPO in January 2007 at Rs 225 per share. Funds raised through the IPO have been used to upgrade and expand Autoline's Chakan facility in Pune; set up another manufacturing facility at the same location; relocate and consolidate a couple of smaller units; establish a corporate office; fund acquisitions, and provide long-term working-capital resources. The post-issue equity capital of the company is Rs 12.22 cr. of which promoters hold 26.62%, FII/Mutual funds hold 1.82%, Bodies corporate hold 16.65% and Public holds 54.91%



The Indian automobile ancillary sector is transforming itself from a low -volume, highly fragmented one into a competitive industry, and backed by competitive strengths, technology and transition up the value chain. Despite a relatively small share of Asia in the global pie, India is now amongst one of the most preferred destinations and has come to occupy the image of an exporting hub for most of the major global OEM players. Almost all the big auto manufacturers of the world are either already or are in the process of outsourcing from India. AIL has realized the potential of component manufacture business. It owns in-house design engineering, rapid prototyping and mass manufacturing capabilities. AIL had an in-house CAD/CAE/CAM facility and decided to scale up the capabilities of this facility by acquiring a design engineering software company (a majority stake 51%) in Autoline Dimensions Software Pvt. Ltd. (Formerly known as Dimensions Engineering Software Services Pvt. Ltd.), which has expertise in design engineering services. Further it plans to expand capacities by setting up another plant at Chakan (Unit –II). AIL has taken efforts to shift from low margin products to high margin products. Autoline Dimension would be one of the future growth driver providing a boost to AIL’s revenue.



For the Q4 ended March 2010, AIL has posted net profit of Rs 8.82 cr.(against loss of 0.72 cr.) on net sales of Rs 145 cr.(up 82%) on consolidated basis. For FY10, AIL has reported net profit of Rs 20.6 cr. (up 340%). on net sales of Rs 451 cr. (up 29%). on consolidated basis.. On a equity of 12.2 cr., the EPS is Rs 16.9 and the dividend declared is 20%. On Oct. 28, 2009, Autoline Industries USA, a wholly owned subsidiary of Autoline Industries announced that it has received orders to manufacture brake and clutch pedal assemblies from 2 US automakers. The new business will bolster the sales of US unit by US$ 40 Million over the next 4 year period. AIL should be able to post a topline of around Rs. 600 cr., and PAT of Rs. 27-Rs 28 cr., giving an EPS of Rs. 22-23 for FY11. At the current market price of Rs 128, the stock trades at 7.6 times FY10 earnings and at 5.7 times its FY11E earning(Rs 22- Rs 23). In view of the improved results and good medium term prospects, Investors can start accumulating the stock at current levels and add more on declines for decent returns of 50%-60% over the next 8-12 months. Accumulate



Latest Developments- Autoline Industries has drawn up a Rs 255 cr. brownfield expansion. This will be funded through internal accruals and term loans. The expansion will add another 1,000 employees to its 2,000-strong workforce. It will involve an additional 40 acres to the existing 100 and is expected to be over by 2011. The company has sought mega status (which translates into concessions in stamp duty and electricity tariff) for the project from the Maharashtra Government. Approval could be granted by January. The project is also eligible for industry promotion subsidy. The expansion plan involves ramping up the production line, creating a tool room and adding prototyping/designing facilities at three sites in Pune district. Autoline wants to become a complete designing, engineering and manufacturing entity for mechanical assembly systems in automobiles. The idea is to make components based on designs provided by carmakers. At present, the company has orders for designing and manufacturing pedal assemblies for Volkswagen whose facility is also at Chakan. It supplies the same part to Tata Motors for its Indica and Ace models.



Allied Digital Services Ltd (Rs 225)

(BSE Code- 532875 NSE Code- ADSL)

(P/E- 9, FY10 Sales- Rs698 cr, Market Cap- Rs1045 cr)



As businesses around the world grow, so do their IT spend and the complexity in managing IT infrastructures. With companies having their offices at multiple locations, it has become very important that their IT infrastructure is secure and running all the time. For this, outsourcing IT infrastructure to experts is the viable solution for any organisation, so that it can spend resources on its core activities and thereby save time and money. This trend favours IT infrastructure management company - Allied Digital Services (ADS), which has to its credit, the first Security Operation Center (SOC) that provides proactive protection and risk management for enterprise security round the clock. ADS is riding on high-growth domestic markets of system integration (SI); IT infrastructure management services (IMS) and remote infrastructure management (RIM). RIM is expected to be $13-15bn opportunity for the Indian IT industry by 2013 from the current $3.6 bn, as per the latest Nasscom and McKinsey report. Recent acquisition of EnPointe Global Services (EGS), the US-based IMS provider, marks ADS’s foray into international markets



ADS is into IT infrastructure management, security management and technical support services. The company, which has long been present in the domestic market, is now also looking at global markets. The company has started venturing into overseas territory, mainly the US and Australia. It acquired a US company called EnPointe Global Services, a carved-out subsidiary of Nasdaq-listed EnPointe Technologies in July this year. On the domestic front, the company sees ITenabled services, pharma outsourcing, knowledge process outsourcing and contract manufacturing as some of the demand growth areas for its network and security operations.



System integration, which involves designing and setting up of IT infrastructure for enterprises, accounts for 70% of ADS’s revenue and enjoys EBIDTA margins of about 18%. The balance 30% of the revenue is generated from ‘services’ comprising of Infrastructure Management Services (IMS), annual maintenance contracts and technical support. The company is working towards increasing the contribution from services to about 50% by FY10 as it enjoys a much higher EBIDTA margin of 50-60%. The company enjoys 13% market share in the domestic IMS segment and caters to a diverse customer base across the banking, manufacturing, retail, telecom and BPO industries. As per McKinsey, the global IMS industry size is estimated at $524 billion in 2008. Out of this, the addressable market for remote IT infrastructure management services (RMS) is estimated at $104 billion. RMS is a major thrust area for ADS. Through a global development centre, which comprises Network Operation Center (NOC) and Security Operation Center (SOC), ADS provides remote management services



ADS delivers services through its own facilities and centres, spread across 92 cities and follows a ‘direct’ model rather than a franchisee model, as adopted by its peers. This gives the company a direct control on the quality of service and helps it maintain the desired level of efficiency due to uniformity in training. Also worth noting is the fact that, ADSL has a vendor neutral approach and does integration based on the customer’s requirement. This has led ADSL to be a solution partner for some of the big names in the industry and develop technical expertise over a vast range of products. Since security compliance would be a subject of meeting regulatory requirement, US economic slowdown will pose minimal risk to ADSL’s prospects, while the currency risk is limited as more than 90% of ADSL’s revenue come from domestic operations.



ADS’s revenues and profits have grown at a CAGR of 45% and 70%, respectively in the last three years. For the year ended March 2010, ADSL posted 26% growth in consolidated revenues at Rs 698 cr. Solutions accounted for Rs 305 cr. (44%) and services accounted for Rs 392 cr.(56%) of the revenues. EBIDTA margins increased 210 bps y-o-y to 20.4%. Net profit increased 38% to Rs 106 cr.. On a equity of 23.24 cr.(Promoters’stake- 43.43% FII / MF stake-30.48%), the EPS on a Rs 5 paid up share stood at Rs 22.8. ADSL has a strong order book of Rs 540 cr. (approx 59% of FY11E revenues) which increases the revenue visibility going forward. ADS is expected to post a growth 40%-50% CAGR in EPS over next 3 years. At the current market price of Rs 225, stock trades at 9.8x and 7.5x of FY10 (Rs 22.8) and FY11E earnings(Rs 30), respectively. Strong revenue visibility, changing business mix, improving margins and higher return ratio make it a good investment bet. Investors can start accumulating the stock at current levels and add more on declines for decent returns of 50%-60% over the next 8-10 months. Accumulate