The top five mid-caps to own

With broader market valuations turning rich, investors could gain from the next rung of value picks.

Even after the correction over the past few sessions, the markets are not far from their all-time peak and valuations continue to be rich. Most large-cap stocks seem fairly priced, so market pundits advocate being selective in picking stocks. Many believe mid-caps, which have not fully participated in the rally and where valuations are still attractive, could deliver better returns over the medium term.

“Barring global events, the markets could spend some time in a range-bound pattern, which is why we see a selective approach working in favour of the investors. Also, it is hard to find value in the Sensex and Nifty companies. In contrast to this, the BSE MidCap index is still far from its peak and many mid-cap companies are trading at very good valuations,” says Gaurav Dua, head of research, Sharekhan.
 

TOP PICKS
	PE (x) FY11E	EPS CAGR (%)

CMP
(Rs ) FY12E (FY10-12E) HCC *32.821.128.359 IL&FS Transport *13.411.026.0308 Tinplate6.45.424.777 TRIL6.55.129.6339 Tulip Telecom9.46.024.6178 ...AND SOME MORE Apollo Tyres8.25.61.866 GIC Housing Finance10.78.716.4146 Glenmark Pharma19.116.332.0343 Patel Engineering *15.412.326.0366 Pratibha Industrties8.05.932.871 * PE alone does not refelect the true value. These companies have various businesses, which offer good value and need to be considered separately; E: Analysts’ estimates

The ongoing correction in the market offers an opportunity to pick some fundamentally good mid-cap stocks, capable of delivering good returns. We spoke to several research heads to know their top picks in this space. We selected 10 companies (see table, Top Picks) with market value of less than Rs 10,000 crore. We touch on five of these: all 10 offer a good combination of value and growth.

HCC
HCC has strong revenue visibility, as the order book is almost Rs 21,000 crore, 4.6 times its 2010-11 estimated sales. Besides, it owns seven infrastructure assets worth Rs 5,600 crore. The company aims to expand it’s infra asset portfolio to Rs 15,000 crore by 2013-14, which will provide consistent revenue in the form of annuity. Two of its real estate projects in Mumbai have already seen traction and will be completed in a phased manner.

Its largest township project, Lavasa (HCC’s stake is 65 per cent), is expected to hit the Initial Public Offer (IPO) market soon. After listing, it could create good value, as HCC’s stake could be valued at about Rs 3,500-4500 crore. Analysts conservatively value HCC at Rs 75-80 per share. This does not fully reflect the value of its various assets. For instance, analysts have been cautious in valuing HCC’s Lavasa stake, as they await details regarding its IPO, actual pricing and equity dilution. Even otherwise, at Rs 59, the stock offers a favourable risk-reward equation.

ITNL
There are expectations that awarding of new projects in the road segment will further improve in the near term, good news for companies like IL&FS Transportation Networks (ITNL). Notably, it has the strong backing of its promoters, industry understanding, superior execution capabilities and an integrated business model. ITNL is India’s leading road infrastructure player, with 24 projects covering 15,000 lane-km, expected by 2014 to increase to 36,000 km. Besides road projects, the company also has EPC orders of about Rs 16,000 crore, almost nine times its 2010-11 estimated revenue and provides strong visibility.

Tinplate
Tinplate Company of India will benefit on account of its recent agreement with its promoter group company, Corus (Tata Steel Europe), one of the largest tinplate players in the world. While it will leverage on the expertise of Corus, the deal will also lead to higher exports (currently 25 per cent of revenues) of tinplate, used for packaging products. Back home, it has a 35-40 per cent market share in this business, expected to grow at a healthy pace. There are large opportunities in India for packaged food and edible oil, which will grow as per capita consumption improves. The company has more than doubled its capacity to 379,000 tonnes and is almost doubling its cold rolling mill capacity to 380,000 tonnes by the end of 2010. This will help in higher revenue growth and in margin expansion.

TRIL
Transformers & Rectifiers India, which manufactures a wide range of transformers, is set to benefit as capital expenditure in the transmission and distribution segment is expected to increase. It has an order book of Rs 394 crore, more than half of the current year’s expected revenue. Recently , the company also signed an agreement with a leading global manufacturer for 765-Kv transformers, enabling it to cater to the growing demand for high capacity transformers. The company’s earnings are expected to grow at about 29 per cent annually over the next two years, which is good.

Tulip Telecom
Tulip Telecom provides wireless enterprise connectivity, considered a promising area in terms of revenue visibility. The company aims to participate in government connectivity projects, where the potential is high. It also provides value-added services like data transfer and remote access. It has laid down a network of 6,000 km of fibre lines, operating a network across 50 cities. The fibre business contributed about 25 per cent to revenues in 2009-10, which could go to almost 70 per cent by 2012-13, leading to margin improvement.