Bhavin Shah, CEO, Equirus Securities picks some midcap companies across sectors, which he expects to do well in 2011. He told CNBC-TV18 that he likes select stocks in the infrastructure space and recommends Supreme Infrastructure and KSK Energy in the sector.
According to him, gas is an underrated sector and believes the demand for gas is going to continue to outstrip supply by a long way. GSPL is one stock idea that he recommends to investors.
He further says that midcap IT companies are expected to face a range of challenges in the new year. Below is a verbatim transcript of his interview. Also watch the accompanying video.
Q: Some experts have been very positive on infrastructure stocks, and believe that most of the bad news is in the price and that construction activity could pick up and give some of the capital goods players and infrastructure space some kind of a leg-up. Would you share that view?Can you see any interesting midcap picks in the infrastructure space at all, considering that they have not done much in 2010?
A: Yes, we do cover some stocks in the infrastructure space. We are very selective in that space. But for example, a company such as Supreme Infrastructure is one company we cover. This company operates in construction and also in BOT space, has won several contracts and however the stock has not really performed at all.
So we do see significant upside in Supreme Infrastructure and it is one smallcap that we see. Currently around Rs 240 we see upside all the way upto Rs 417. So yes, that is one name that comes to my mind.
If you look at power for example, KSK Energy is one stock in power space, which has come off sharply as well. However, as the market sees numbers coming through in terms of the earnings growth that should also perform quite well.
Q: What about auto ancillaries, that is also a fairly big midcap space and they have been advantaged by the uptick in automobile space, as well as their export dimensions should have improved with the uptick in or at least incipient recovery in some of the western economies, you have Amara Raja in that space?
A: Yes, we like a couple of names in the auto parts and Amara Raja is one of them. It is a company which is the second largest battery producer after Exide. It trades at 11.5 the valuation of the Exide. Amara Raja has not seen much of the earnings improvements in the first half of the year.
But we think that if you look at FY12 when they have new production capacity coming online for two-wheelers and four-wheelers, company will see strong growth in FY12 so something close to 30% earnings growth and without any multiple expansion, the stock will go up around Rs 240, if purely from earnings growth in FY12.
Q: Anything else at all in the auto ancillary space or you would only prefer Amara Raja?
A: We like WABCO, it is a leader in airbricks and as focus increases on safety standards for large vehicles, WABCO is uniquely positioned to benefit that, it is basically a dominant player in that space. It is not a cheap stock, it is trading at a high price to book multiple, obviously supported by very high returns on equity but we do like WABCO, it is a very strong player in auto parts.
Q: GSPL is a stock you have picked out, do you see big growth momentum over there?
A: We believe that gas is one of the underrated stories in India, the demand for gas is going to continue to outstrip supply by a long margin. GSPL won several national pipelines in the recent bids that were announced and those pipelines that they won itself adds Rs 15 to the value of the stock.
However, that has not been factored into the stock given people might still have concerns about what sort of IRR and so on they might generate. We think that something close to 15-17% kind of IRR is still possible from those projects and then the core business itself see pretty strong volume growth close to 18-19% volume growth is quite possible over the next couple of years.
So based on that we do see GSPL worth around Rs 145 compared to where it is trading right now in Rs 110-115 range.
Q: Let us move to other areas, Supreme Industries is also on your list, a plastic maker, what kind of upsides do you see, it is not something you normally see mentioned in list of midcap picks but what kind of upsides?
A: Supreme Industries is a strong player that benefits from all range of markets not only consumer products but also industrial automotive, agriculture, company consistently produces high returns, they operate at around 40% return on equity and has delivered consistent growth over a long period of time.
Supreme is also going to benefit from the fact that they are monetizing real estate, they have a building in Andheri, which they are converting into commercial real estate so they can also benefit from the sale of that asset over the next couple of years. A very strong core business aided by some benefits from sale of commercial real estate.
As a result strong growth over the next few years. We think the stock can go upto Rs 200, so 35% upside is quite possible, again not assuming any major multiple expansions here as well.
Q: To seek your opinion on one trend which is playing out in the market in the past eight weeks, we have seen fairly decent come back of the IT sector especially the big boys or rather only the big boys, the rupee depreciation or atleast the lack of appreciation coupled with an incipient recovery in the US has worked well for these stocks. If you have to play this trend out in the midcap space, is there anything that comes to the mind or you are not quite impressed that they would make any substantial gains?
A: Midcap companies in IT space face a range of challenges. Whenever, some niche is identified by a midcap company often times the big boys also come into that space, if they see that market growing very rapidly and as a result limit the scope for the midcap companies.
The largecap companies come out and give massive wage increases and pose lot of challenges for the midcap companies. So those are challenges a lot of midcap companies face and as a result, it is not easy to find a lot of ideas there.
We recently did upgrade Persistent because we do find that they are in a space, which has got a lot of growth potential and the stock had corrected to a point where we felt there was a good 15-20% upside over a year. So that is one name that currently we have a positive view on. For the latest updates PRESS CTR + D or visit Stock Market news Today
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