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| Value boosters for portfolio |
| Jitendra Kumar Gupta & Vishal Chhabria / Mumbai Aug 12, 2010, 00:54 IST |
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While broader market valuations are not cheap, many stocks are available at attractive prices and are capable of giving good returns.
In the current market conditions, where valuations are not cheap and investment opportunities fewer, market pundits believe a selective approach could pay good dividends. For, quite a few stocks, especially of smaller companies, are still available at fairly good valuations, despite healthy growth prospects.
“At current levels (price to earnings of about 18 times), the markets are trading at an upper band of its valuations. This is why investors need to be selective, pick stocks where valuations are yet to catch up with earnings, which are going to be higher,” says Harendra Kumar, head of institutions, equities & global research at Elara Capital. A recent IIFL report indicates that consensus earnings have seen a downgrade for large caps, whereas mid-caps have seen an upgrade since the start of the June quarter earnings season.
We crunched numbers to arrive at a list of mid-cap companies quoting in single-digit PE multiples, have sound business models and a decent track record in growth and dividends. And, notably, are expected to deliver healthy earnings growth. In most cases, the return on capital employed and shareholder funds is also good, at 20-35 per cent. Here are five of these.
Apollo Tyres
Despite the unimpressive standalone performance (reported on July 29) for the June quarter, consequent to a strike at its Perambra (Kerala) facility and higher rubber prices, Apollo Tyres’ stock has done well. That’s because its global operations (especially Europe) that account for 40 per cent of revenues reported a 55 per cent jump in top line to Rs 704 crore, with sharp improvement in profitability. While rubber prices inched up further in July, the company has already taken price raises which should help sustain margins in the September quarter and improve thereafter, aided by an expected decline in rubber prices.
On the back of healthy demand in India and Europe, Apollo’s top line is estimated to grow by 12-15 per cent and earnings by 20-25 per cent in 2011-12. At Rs 64.30, the stock is available at its five-year average PE and can deliver over 20 per cent return in a year.
Great Offshore
Within the oil and gas offshore value-chain, Great Offshore is among the most diversified players owning drilling units, offshore and other port support vessels. The company is a good long-term play in the growing international and domestic E&P (exploration and production) business. In the near term, too, higher crude oil prices should help in better demand and prices for its fleet. It is in the process of expanding its current fleet of 47 to 49 vessels by end-2012. On the back of higher demand, relatively better day rates, improvement in margins and lower interest cost (led by reduction in debt), the company is expected to post strong results over the next two years. The stock is available at a reasonable five times its 2011-12 estimated earnings.
| VALUE PICKS |
| In Rs crore |
Net
sales |
%
chg |
PAT |
%
chg |
CMP
(Rs) |
PE
(x) |
| Apollo Tyres |
4,978 |
19.2 |
154 |
134.1 |
65 |
9.1 |
| Great Offshore |
996 |
6.0 |
185 |
-3.2 |
410 |
8.5 |
| J Kumar Infra |
774 |
72.3 |
38 |
93.9 |
196 |
7.4 |
| Patni Computer |
1,812 |
7.5 |
454 |
37.1 |
450 |
9.4 |
| Sanghvi Movers |
332 |
-7.3 |
101 |
-10.0 |
173 |
8.2 |
Notes: Financial figures are standalone numbers; change is over corresponding period Financials and PE are for trailing 12 months to June 2010
Source: Capitaline |
J Kumar Infraprojects
Though a relatively small player, J Kumar is a fast growing company in construction. It has an order book of Rs 1,350 crore (two times its 2009-10 revenues) and has bid for projects worth about Rs 4,000 crore. Importantly, the projects it has bid for are spread across the country, which should help this Maharashtra-focused company to diversify its geographical presence. A good client and project profile, with its large in-house fleet of construction equipment, low debt-equity, higher operating margins (17 per cent), robust returns on equity (30 per cent) and, notably, the increasing investment in infrastructure should help the stock (now trading at six times 2011-12 estimated earnings) deliver 20-25 per cent return in a year.
Patni Computers
A project delay and rise in costs due to salary raises impacted the June quarter performance of Patni Computers, the information technology services provider, which has 14,000 employees and delivery centres across 14 cities globally. However, analysts say with the commencement of the project (delayed earlier), the September quarter should be better. And, adjusted for other income and forex gains, core profit growth should be healthy.
The improving economic outlook in the US, which accounts for four-fifth of Patni’s revenues, augurs well. Analysts estimate Patni (which acquired an insurance services firm in June) to report an 8-12 per cent earnings growth in CY11. Considering it had cash and cash equivalents worth Rs 166 per share, analysts don’t rule out more acquisitions. Most analysts have a buy on the stock, with price targets at Rs 500-550.
Sanghvi Movers
Sanghvi Movers, which provides crane services to its industrial clients, has the highest market share here, with a large fleet (of 347 cranes) and tonnage capacity. Helped by recent industrial revival and upturn in industrial capex, sales and net profit showed growth for the June quarter, which comes on the back of declines in the past three quarters. As the demand is increasing, with expectation of higher utilisation and benefits of new crane capacity, the company should do well in the future. The stock is trading at a reasonable six times its 2011-12 estimated earnings.
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