Mid-Cap Growth Picks
The Smart Investor identifies four good stocks that recently declared their annual results.
The unaudited results for over 1,000 companies have already been anno-unced. And though the Sensex has crossed 4,000, it is still a market that is rew-arding stocks with good performance and high future expectations handsomely. So perhaps this is the right time to look for sto-cks in which to take a long-term position.
Taking positions in growth stocks is one way of ensuring reasonably high retu-rns for a few years. Growth scrips are companies that are in the early phase of their growth cycle and profitable enough to grow with their own internal accruals. Their profitability should also improve or be sustained for a few more years as volumes increase and processes get better. These stocks are typically mid-caps.
Investing in mid-caps also makes sense because the Indian market has been punishing small stocks. Eliminate all stocks with a turnover of less than Rs 30 crore for 1996-97. Then choose profitable firms from the list by taking those that have an OPM of close to 20 per cent and whose ma-rgins increased last year.
Since we also want companies that are growing, we take only those whose turn-over grew at least 20 per cent last year. The high operating profits should also translate into healthy net profits, so net profits should have grown at least 20 per cent. Our shortlist now consists of 17 companies.
Of these companies we want those that are relatively new or have new projects and those whose price trends are upward bound. The companies should preferably be in growth industries or have unique products. Their second half year results should be better than that of last year. We also want companies whose stocks prices are not too low.
Relatively high P/Es are safer for a growth stock. It indicates that the market's future expectation from the stock is high. As long as the company keeps up the momentum and the valuation remains the same over a period, the investor gets his returns. For example, Infosys' P/E has been over 20 in June for the past three years.
In June 1994, after the company declared its results for March 1994 when the EPS was Rs 18.40, the price was Rs 412.50 and the P/E 22.41. The corresponding figures for June 1995 were Rs 18.35, Rs 502, 27.35, June 1996 were Rs 28.94, Rs 705, 24.36 and June 1997 Rs 50.94, Rs 1,870 and 36.70.
An investor who entered into this stock in June 1994 would have positive returns every year for three years. Total returns since 1994 is 353 per cent. The P/E has risen from 22 to 36, giving returns both because of growth in earnings and the market's confidence in the stock.
Keeping these factors in mind, we pick four of the 17 firms: HDFC Bank, Leading Edge Systems, JB Chemicals and Pharma and Nalco Chemicals. While two of them -- HDFC Bank and Nalco Chemicals -- are solid portfolio canditates for any investor, the other two seem risks worth taking.
HDFC Bank
Market price: Rs 64.25; P/E: 32
This bank was promoted by HDFC, the country's premier housing finance company in 1993 in strategic alliance with Natwest Markets, the investment banking arm of National Westminster Bank.
The bank made its IPO of Rs 50 crore at par in March 1995. Its paid up capital is Rs 200 crore, of which 25 per cent is held by HDFC, 10 per cent by employees of HDFC and HDFC Bank, 20 per cent with Natwest and the rest by the public.
In the offer document, the bank projected gross income of Rs 127.8 crore and PAT of Rs 39.9 crore for 1996-97. The actual income figures are: Rs 193.33 crore and net profit at Rs 40.5 crore.
In financial 1996-97, the bank's deposits have grown 86.5 per cent to Rs 1,000 crore, up from Rs 686 crore in the previous year. Advances have risen to Rs 575.26 crore (Rs 369 crore previous year), a growth of 56 per cent when overall bank credit grew only 10 per cent. Return on total assets is 2.23 per cent (2.04 per cent), while RONW is 16.59 per cent (9.17 per cent).
The bank has four major areas of business: corporate banking, treasury, capital markets infrastructure and retail banking. It is staffed with professionals from foreign banks andhas no restrictions on expa-nding its branches. It also has no NPAs.
About 31.89 per cent of the total deposits are low cost current account depo-sits from companies, down from 33 per cent last year. The bank has increased savings deposits from two per cent of total deposits to five per cent.
An HSBC Batlivala and Karani report dated May 1997, which continues to put a buy recommendation, says the bank stands much more than other larger banks, from the measures announced in the recent credit policy. The bank's stock trades at a P/E of over 30, indicating that the market has high expectations from the stock.
J B Pharmaceuticals
Market price : Rs 124.75; P/E: 4.15
J B Pharmaceuticals (JBPL) is an old player in the Indian pharmaceuticals industry. It was promoted in 1959 by J B Mody as a partnership firm in the name of Unique Pharmaceutical Laboratories. It eventually went public in November 1985 at par.
JBPL's turnover mostly comes from branded formulations but it has back-integrated into bulk drugs. The turnover for 1996 was Rs 131.62 crore of which Rs 98.38 crore came from manufacturing and Rs 33.23 crore from trading. The company has a strong presence in the cardio vascular, amoebicide/anaerobicide, anti-rheu-matic and anti-peptic-ulcerant segments. It is one of the largest domestic producers of metr-onidazole. Metronidazole is a bulk drug used in the anti-amoebiosis therapeutic segment.
'Metrogyl', a branded anti-amoebicide has a 16 per cent market share. JBPL is ranked 46 among pharma companies by a January 1997 ORG report.
The company has 12 manufacturing plants and two R&D facilities. It has a marketing and distribution network comprising 13 branch offices, four super stockists and about 1,100 stockists backed by a marketing team of 300 people.
JBPL's efforts at exports have been successful. Exports grew 52 per cent from Rs 47.70 crore in 1995-96 to Rs 72.33 crore in 1996-97. To enter the overseas market for its branded products, JBPL has registered its products in 20 countries .
The results for 1996-97 are spectacular. Cash profits stand at Rs 24.3 crore and total reserves are Rs 71.43 crore. The book value is Rs 117 and RONW works out to 25 per cent. JBPL's gross block, which stands at Rs 52 crore, has been entirely funded by debt and internal accruals.
The company raised Rs 9.68 crore through a 1:5 rights issue in September 1996 at a premium of Rs 70 per share to finance a plant at Ankleshwar to make tablets and ampules. This plant is to conform to FDA standards and will cater to the lucrative markets of West Europe and North America. The total project cost is estimated at Rs 11.5 crore and it is expected to start trial runs in September 1997. This project is on schedule.
JBPL plans to make natural products -- including medicines, cosmetics and food supplements -- its focus. There are also plans to explore the possibility of putting up a factory in Europe to make natural branded products. It also plans to get into growing herbal plants either on its own or by encouraging farmers. There are also plans to launch new products in various therapeutic segments this year.
The company's stock is discounted only four times because market players do not like the scrip too much. However, at its current price, it could be a risk worth taking.
Leading Edge Systems
Market price: Rs 132.75; P/E: 7.16
The Mumbai SEEPZ-based software company, Leading Edge Systems, is another start-up promoted by three software engineers in 1986 to provide turnkey software solutions to the domestic market. The company's domestic clientele includes Hindustan Lever, Great Eastern Shipping, UTI Securities Exchange, Lloyd's Securities, SHCIL etc. It has now set up a separate development facility to cater to the domestic financial services market.
In 1988, LES started on-site software services. Some of its international clients are Pepsi, Hitachi, KPMG Peat Marwick, Deloitte & Touche etc. In 1993, it set up a branch office in New Jersey to offer turnkey software solutions to the US market. This area of business is expected to contribute substantially to future sales.
LES executed its first offshore project to develop a purchase and inventory system for the Pennsylvania Fish Commis-sion. It also has another offshore contract to develop an inventory management software for Cygna Corporation in the US. It is also negotiating with Reuters to become its application development partner for extending Reuters's news updates to other terminals other than Reuters.
There IPO from LES came in January 1995 at a Rs 40 premium, raking in Rs 4.11 crore. The funds were to be used to create a new software development facility. The projections made for 1996-97 in the public issue was: turnover of Rs 22.45 crore and net profit of Rs 5.38 crore. The company has surpassed these projections.
LES has a lower OPM compared to most other software developers because a major part of its turnover comes from on-site services. As it gets into more offshore projects its profitability should increase. The predominance of on-site turnover is also the reason why LES has a low discounting. The future focus is also on expanding operations to Europe and financial markets in South-East Asian countries.
Nalco Chemicals
Market price : Rs 405; P/E 26.71
Nalco Chemicals of the US has acquired a majority in the company buying out 24 per cent stake of ICI India in September 1996. The US-based parent which already held 40 per cent stake bought 12.5 lakh shares from ICI at Rs 300 per share. This was in line with ICI's worldwide policy decision to pull out of water chemicals. The company was co-promoted to make specialty chemicals like water treatment chemicals, oilfield chemicals and industrial additives. The public holding is 20 per cent.
Water treatment is Nalco's mainstay. It has launched 'Trasar' a unique control and diagnostic system, which has been implemented in more than six sites. It faces competition from Ion Exchange and the Pennsylvania-based Betz Laborat-ories. It caters to industries like steel, fertiliser, oil refining, petrochemicals, power, mining and minerals and pulp and paper.
The company has introduced process chemicals for the paper and pulp industry which reduce pulp consumption, improves the finish of the end product and increases productivity. It provides expertise in alumina production and coal washing and has developed new products in coal treating. In the petroleum process chemicals business, Nalco Chemicals has access to technology from Nalco Exxon Energy Chemicals, a 50:50 joint venture between Nalco Chemicals of the US and Exxon.
This is a frequently traded scrip, has always enjoyed a very high discounting. Definitely a scrip to watch.