Anish Damania of Emkay Shares & Stock Brokers discusses his favourite picks in the midcap space. He feels that Greaves Cotton has good sales and margin growth, and will have an EPS of Rs 21.4 for FY07.
He also likes Sterlite Optical and has a target price of Rs 224 for that stock. He says that Nahar Industrial is capturing the entire chain of the textile industry in India, and he is looking to increase the EPS to about Rs 20 in FY07.
He also talks about Kirloskar, and feels that it might be able to scale up a little bit on its margins front.
Excerpts from CNBC-TV18's exclusive interview with Anish Damania:
Greaves Cotton - tell us about that story and why you like it?
In the diesel engine space or engine space, Greaves is a play on the growth in the auto engines as well as industrial engines segment. Nearly 75% of their sales come from the engine segment.
They are also into infrastructure equipment, which forms about 15% of their sales, and is also growing very rapidly. So both these businesses are giving them a good turnaround in margins, in sales growth and therefore in profitability.
So we feel that there is good sales growth ahead, good margin growth and therefore profits will run ahead of sales growth in Greaves.
How does it stack up in valuations terms- could you put that into perspective?
We are looking at an EPS of Rs 21.4 for FY07 and about Rs 29 for FY08; it's approximately at 11 times FY08 earnings. Given the fact that they are growing great guns, I might be positively surprised on the earnings forecast of my analysts. So it's traded about 11 times FY08 earnings.
Looking at ROCE (return on capital employed) of this business which is approximately 48%, if I look at the profit growth, which is close to about 30% plus, I should see this stock trading at a premium to the market valuations.
The most liquid in your bunch is Sterlite Optical. Why do you like it and how did you read the recent reorganisation of the business within the group?
If you look at Sterlite Optical, the story dates down to nine months back, when the promoters did a preferential issue at Rs 100 per share. The share price was languishing at about Rs 85-100. At that point of time, we thought that since the promoters were showing this interest in the share, there must definitely be something which could be happening.
Its business consists of; the telecom, gelifil cables and OFC (Optical Fiber Cables). Gelifil cables after a long period of struggle, has now stabilised. It is on a little bit of an upmove.
But the major revenues are coming from the optic fiber cable business which is growing at about 50-60%
So we feel that in the telecom business itself the company could grow about 30-40% per annum over the next two-three years. The acquisition of this business now, in the power conductor side, is another major opportunity. We see sales growing at about 70-80% per annum over the next two-three years with a stable margin kind of scenario.
So we are looking at an EPS of somewhere closer to about Rs 14 for FY07 and about Rs 22.5 for FY08. So to that extent we feel that there is opportunity in this stock for another 30% appreciation at about Rs 224. That is what we are looking at as a target price.
Nahar Industrial is the other stock, which you picked. What are the price and earnings targets on this one and why do you like it?
Nahar Industrial is among the few stories in the textile space which starts from the yarn stage right up to retailing. This company is adding capacity in both yarn as well as in the process fabric, which are the two major ingredients for value addition going forward.
We feel that the capex of about Rs 8 billion is going to double its turnover and do a lot to its margins. When you move from yarn into process fabrics, the margins are definitely higher. Moving further on to retailing, would give even higher margins.
So this is one company which is capturing the entire chain of the textile industry in India. I think we are looking to increase our EPS to about Rs 20 in FY07 and about Rs 30 in FY08 which gives us a target price of somewhere closer to Rs 300.
Could you comment on Kirloskar Oil Engines, which you like at Emkay?
Kirloskar Oil Engines is into all types of engines, right from less than 20 HP going up to 4 megawatts. But if one looks at that segment, it is growing at a very fast pace. The margins at Kirloskar Oil Engines are at about 11%, which is lower than the industry average of 15-16%.
There is a chance that Kirloskar might be able to scale up a little bit on their margins front.
Also the sales growth story is very good. So as a result, we are looking at somewhere around Rs 18 EPS for FY2008 and our target price is about Rs 265.
Any disclosures?
All the stocks that we have talked about are under the coverage of Emkay. It is possible that some of the employees of Emkay would be holding these stocks.
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