Midcaps Buys

Midcaps have taken the brunt of the recent selling.



We ran a business-quality filter on some hard-hit midcaps, and got this list. We believe these stocks have been wrongly punished, and do not deserve to fall with many of their less-worthy peers. In fact, the current correction provides a great window of opportunity to enter quality mid-size businesses whose fundamentals are in sync with theIndia story. Market sentiment may turn on a dime, but our analysts are willing to stand by their BUY calls on this WORTHY DOZEN.



Should you want more clarity, please do not hesitate to call us for more information or a management interaction.



** Deepak Fertilisers (DFPC IN, INR 161, BUY) – new capacity to add value

· Despite sluggish Q2FY11 results, we upgraded Deepak’s revenue and earnings estimate upwards for FY11 and FY12 due to timely commissioning of its new 300kt TAN plant. TAN sales are expected to be strong in Q3FY11, on account of the shift of demand from Q2FY11 when the demand was sluggish on account of good monsoons.

· Impact of the lowering of subsidy under NBS scheme is expected to be negligible for DFPC as fertilizers contribute ~30% to the net revenue and just ~10% to PAT.

· Has corrected ~25% in one month, and is now available at 7.7x and 6.1x consol P/E, 5.2x and 3.8x consol EV/EBITDA for FY11E and FY12E. 2.8% div yield makes it further attractive. BUY



** Jindal SAW (JSAW IN, INR183)

· Diversified product profile of SAW, DI and Seamless pipe. Current order book of USD900m (0.75x of FY10 sales). Margins (currently EBITDA/t INR11.6k) likely to expand in future due to backward integration of DI pipe (Rajasthan iron ore mine, 33% of total volumes).

· Investments in group companies valued at INR31bn (60% of mcap) which is likely to be demerged and listed by June’11 (potential trigger). Jindal ITF, subsidiary that invested in infrastructure business is likely to generate earnings from FY12 (a potential upside to earnings).

· Core business trades at FY12 PE of 5.5x (assuming 50% holdco discount to investments) which is debt free and likely to generate FY12 RoE of 15%



** Federal Bank (FB IN, INR 409) – New mgt to focus on growth

· FB is currently undertaking a restructuring exercise, putting people (new CMD) and processes in place to further enhance productivity and achieve growth while maintaining high credit standards. Near term trigger for the stock will be decline in slippages and consequent reduction in credit cost which act as a buffer for the bank to undertake the restructuring exercise without disturbing higher RoAs.

· With credit growth at 24% and margins at 3.5% (calculated) over FY10-12E, we expect earnings CAGR of 31%, with RoE improving to ~15% by FY12E from 10.3% currently.

· The stock is trading at attractive valuations of ~1.2x FY12E book and ~8.5x earnings



** IRB Infra (IRB IN, INR 204) – enough cash to fund existing projects; upside from EPC business

· Stock has corrected 35% from the peak on two concerns – delay in execution (4 projects won last year) and slowdown in NHAI order which we believe is factored in prices

· We like the stock because (1) Of its 16 BOT projects, toll collection has already begun on 10 projects (2) No equity dilution as surplus cash sufficient to meet its equity commitment on existing projects (3) We expect EPC revenues to pick-up going ahead with execution to start on the 4 new projects

· We value the BOT portfolio at INR 189/share. Also cash/share adds another ~ INR 15 to the stock price. This means that the entire EPC business is not being ascribed any value at CMP of INR 204. Even giving a 1 year forward P/E multiple of 6x to the EPC business (FY12 PAT from EPC estimated at INR2.5bn) means an upside of INR 45 from current levels.



** Navabharat Ventures (NBVL, Rs 304) – Power play with strong balance sheet

· Power capacity doubling by FY14 to 600 MW, coal mines to deliver 2 mTPA by FY13. Our view on convergence of merchant and PPA tariffs will keep NBVL’s profits intact.

· Recent power plant sale to Essar Power generated enough cash to fund capex till FY13, without resorting to fund raising. Ferro alloy biz volatility hedged via power; leaves scope for cashing in on spikes in ferro alloys.

· Existing India biz (ferro alloys + NPV of existing power at Rs 4/u + sugar biz, cash at BV) is today worth Rs 370/sh. Add Rs 80 NPV of proposed projects + Rs 64 of coal assets, SOTP = Rs 514 !



** Shree Renuka (SHRS IN, INR 76) – deleveraging balance sheet will lead to re-rating

· Expected SS11 global surplus has been cut due to weather disruptions in Brazil, India, Russia and Thailand. Kingsman now predicts 1.5mt of surplus in SS11 vs 3.5mt earlier.

· Global sugar prices remain high, while likely announcement of free export will improve domestic prices. With strong cash flow expected for next two years we expect debt equity to reduce to 1.2x (FY12) from 2.4x in FY10.

· Renuka has corrected 25% and at EV/EBITDA of 4.5x and PE of 7.6x stock looks attractive



** Sintex Industries (SINT IN, INR 185)

· Monolithic Segment - 'HIGH' Growth opportunity in a '300 bps Higher Margin Biz' - Order book 3x FY10 monolithic sales; EBITDA margins at ~19% vs ~16.2% blended margins - with higher growth expected revenue share can increase from 22% in FY10 to ~32% in FY12e leading to EBITDA expansion;

· Capacity in monolithic to not be a problem as Sintex is looking at acquiring a domestic player. Custom Moulding Segment to witness rapid growth (mgmt guidance at 20-25% growth)- Has added two large global electrical players as clients, and is setting up dedicated mfg. lines

· The stock is currently trading at 11.3x FY12EPS.



** Bajaj Electricals, (BJE IN, INR 227)

· With increasing rural electrification, Bajaj Electricals' strong nationwide distribution network gives it a better reach than competitors in the small appliances and lightings/fittings business. Flexibility of outsourced business model: strong and exclusive vendor relations (70% dedicated) ensure smooth manufacturing. Outsourced business model helps BEL to focus on its core competencies of marketing & distribution.

· The company is diversifying from a pure lights company into Engineering and Projects (E&P), and this will boost growth and will improve the margins to around 11%. Strong order backlog stood at INR 11.5 bn (58% transmission towers and 32% special projects, average execution cycle of 15 months), which is 1.5x FY10 E&P revenues, gives good visibility.

· BJE is currently trading at 14.8x and 11.6x FY11E and FY12E earnings respectively. Estimating a ~25% growth in earnings and a RoE of 28% in FY12, we consider it fair to give a 15x multiple to FY12 earnings of INR 19.4, resulting in a target of INR 291.



** Dish TV (DITV IN, INR 64)

· Market leader in an emerging sector - enjoys a ~32% market share with a head start of 2-3 years. India’s DTH industry may become world's largest [40 mn subs in FY12 from 29 mn currently]

· Dish TV advantage - Strong market share + Strong balance sheet [INR 6.5 bn cash] + Strong distribution network [presence in 6600 towns] + Strong presence. Sharp EBITDA margin gain (3x!!!) on operating leverage - shift from variable to fixed cost-cost content contracts; sharp reduction in advertisement and subscriber cost/gross sub to boost margins.

· Dish trades for 13.7x EV/e on our FY12 estimates. BUY



** VIP Industries (VIP IN, INR 545)

· Strong demand in luggage segment; mgmt. guidance at 20% topline growth for 2 years; Higher sales contribution from soft luggage biz and strong operating leverage to boost margins from 14% in FY10 to 19.5% in FY12e

· In order to reduce the reliance for soft luggage imports from china the management has decided to start its own manufacturing facilities in Bangladesh. However this would come on stream around FY13. The capex however for the plant would only be around INR 50 mn

· Outlook remains promising. VIP trades at 11.5x FY12e at CMP of INR 545. We recommend 'Buy' with a target price of INR 760



** B L Kashyap (KASH IN, INR 30)

· Strong revenue visibility with order book of ~ INR 40 bn which is ~4.0x its FY10 revenues. Order intake robust for H1FY11 at ~INR 16 bn; BLK is also trying to enhance its presence in urban infra & airports space to broad base its future order inflows.

· Debt levels to reduce from 0.8x currently to 0.7x by FY12E end as monetization of its realty projects is expected to begin in next couple of months. EBITDA margins to increase from 8.3% in FY10 to 9% in FY12E as operating leverage kicks in from strong revenue growth & reducing debt levels.

· At INR 30, KASH trades at P/E of 12.0x and 8.3x for FY11E and FY12E numbers. We believe there are upside risks to our estimates, particularly for FY12.



** Emami (HMN IN, INR 356)

· Zandu acquisition a key trigger - is rejuvenating >200 Ayurvedic based prescription products - expected to grow at ~40% CAGR over 3 yrs with 40%+ NPM. New launches on the card- test marketing the hair color segment at low price levels and continues to evaluate baby products, and a 5-in-1 shampoo.

· Well placed to expand internationally with strong Ayurveda focus - WHO expects global herbal market to reach USD 5tn by 2050 (from USD 3bn); good traction in SAARC & African countries.

· The stock has corrected on the back of rumours that the co might bid aggressively to acquire Paras Pharma. With Reckitt winning Paras Pharma for Rs.32.6bn (Bloomberg News), the overhang on the stock is over.

· Strong B/S: D/E at 0.1x in FY10; expected to be debt free in FY11, giving room for further acquisitions/expansion. However, acquisition of Paras Pharma can be risk depending upon the price it pays. At INR 356, trades at P/E of 23x FY11E & 18.3xFY12E earnings.