Most of the action in the markets now lie in the midcaps and smallcaps. Avinash Gorakshakar of Emkay Shares & Stock Brokers talks about two of his interesting picks in the midcap space: Ahmednagar Forgings and Subros.
Gorakshakar describes Subros as one of those companies, where there won't be any equity dilution. He further informs that the company has been averaging a very attractive ROE of roughly about 20-24% and very high cash earnings levels. He feels that there is quite a lot of juice left in this stock.
As regards to Ahmednagar Forgings, Gorakshakar is extremely positive on the company's revenues. According to his assessment, the company's revenue should increase from Rs 375 crore to around Rs 840 crore in the next two years.
Excerpts of CNBC-TV18's exclusive interview with Avinash Gorakshakar:
You have got a couple of interesting auto ancillary plays: Ahmednagar Forgings and Subros. Let's start with Subros; what is the story there, why do you like it?
Subros is typically a tier I supplier to Maruti and Tata Motors. The company has been doing pretty well in the last 2-3 years. If one looks at the kind of compounded growth in the last 2-3 years, they have been averaging about 12-13% in volume growth, which has been mirroring Maruti's growth.
In fact, a couple of days ago, Maruti had its AGM (Annual General Meeting) where they clearly said that from the Nissan JV as well as its own expansion plans, they are looking at a volume of around 1 million cars by 2010.
Typically, Subros enjoys very good technology skills in the auto air-conditioning space. They have a market share of close to about 45 per cent and EBITDA margins have also been showing a very positive up-curve. In fact, they have been doing lots of work on in-house R&D of reducing the imported material cost.
Frankly, we recommended the stock because we felt that despite being a Tier I supplier and having a very large revenue base of around Rs 550 crore (Rs 5.5 billion) odd and a reasonably good EBITDA of Rs 61 crore (Rs 610 million) last year, the stock was trading at a multiple of just about 6 times. So we started recommending it at around Rs 184, and gave a target price of Rs 280.
The stock has already moved up by around 17 per cent to Rs 220 odd. We are looking at earnings of roughly about Rs 24 for '07 and Rs 29 for '08. So despite the run up, I think there is pretty good juice left in the stock. In fact, this is one of those companies, where I believe, there won't be any equity dilution.
The company has been averaging a very attractive ROE of roughly about 20-24 per cent and very high cash earnings levels. The company should be recording cash earnings of roughly about Rs 50 for '07. So even based on a net multiple basis, as well as on a cash-earning basis, the stock looks quite under-valued.
Ahmednagar Forgings is the other stock, which you like. Tell us why and what is your price target on that one?
We recommended Ahmednagar Forgings at Rs 186. To start with, our target price is Rs 335. Ahmednagar Forgings is a part of the Amtek Group Company. Amtek Auto holds a 51 per cent equity stake. Typically, this company makes light forgings and caters largely to commercial vehicles, two-wheelers and the passenger car space.
In fact, the domestic order book pipeline is extremely strong for the next 12-18 months. In fact, the company supplies a large portion of its business to Tata Motors. Bajaj Auto, HMSI (Honda Motorcycle and Scooter India) and in fact has been one of the emerging larger players from the Pune belt.
The company has been saying that they would be averaging a topline growth of at least 35-40 per cent for the next 12-18 months. Last year, the company recorded revenue of Rs 375 crore (Rs 3.75 billion) and a bottomline of Rs 38 crore (Rs 380 million); that is on an equity of Rs 33 crore (Rs 330 million). In fact, the company is implementing an ongoing expansion programme and they are increasing machining capacity from roughly about 20,000 to 40,000.
The company is also planning to increase its rough forging capacity by another 10,000 tonnes. Typically the capex, which was outlined at around Rs 150 crore odd was funded by a private placement, which was made to institutions and FIIs at a price of Rs 161. So the funding has got completed, in fact the equity went up from Rs 8 crore (Rs 80 illion) initially to Rs 22 crore (Rs 220 million) after a 2:1 bonus. And after that the company issued shares at Rs 161, so the equity is now Rs 33 crore.
The bigger trigger for Ahmednagar Forgings will come from October end onwards; the company has acquired a foreign company called Tycos in US and this is a company, which has a presence in the petroleum and the refining sectors and typically the company will be outsourcing a major portion of this business.
Both the lines from Tycos will be implemented by the end of October and we expect that this business has a potential to give a revenue of almost Rs 300 crore (Rs 3 billion) plus on a full year basis.
Coming to the valuation part, what we liked about the company is that for the last 3 years, the company has been consistently achieving a good topline and EBITDA margin growth. In fact, EBITDA margins for this business, despite a small presence from the machining segment are in the region of 20 per cent. And going forward with machining increasing plus the Tycos business coming in because Ahmednagar was never an export oriented company, the company will now be a very large player on the export space.
The company's revenues we believe is one thing, which we are very positive on. According to our assessment; from Rs 375 crore (Rs 3.75 billion), the revenue should increase to around Rs 840 crore (Rs 8.4 billion) in the next two years. So revenue visibility continues to be very strong and on the EPS basis, we estimate an EPS of rough about Rs 20 for '07 and for '08 we are looking at the earnings of roughly about Rs 27.
So based on a multiple basis; that is on a '07 multiple, the stock trades at a multiple roughly around 11 times and around 9 times on '08. Despite the fact that the stock has gone up by almost 20-22 per cent after we recommended it, I still feel that there is an upside of roughly about 35-40 per cent left. The stock should definitely achieve a target price of Rs 335.
Any disclosures that you need to make personally or for your firm or clients on these two stocks?
Our company might be dealing in these shares and might be recommending these stocks. But typically, if you ask me, I don't own any of these stocks personally.
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