 "A dozen mid-caps to bet on")
Also, as some large-caps have already run up sharply in recent years, stock valuations of mid-caps look more attractive. For instance, the S&P BSE Sensex is 17 per cent higher than its 2008 peak, whereas the BSE Midcap index is trading 20 per cent lower than its all-time high in 2008. Even based on historical valuation, the BSE Midcap index is trading at 10.75 times its earnings and 0.96 time its book value versus 18 times and 2.87 times, respectively, for the Sensex.
Research houses, thus, are strongly recommending mid-cap and small-cap companies. Here are 12 companies being recommended by more than one research house, expected to report healthy growth in earnings over the next two years.
Ashok Leyland
After a poor FY14 for this commercial vehicle (CV) maker, there is an expectation that demand could pick up in FY15, led by a stable government and likely pick-up of the investment cycle. Discount levels had peaked in the December quarter and are moderating, while freight rates have inched up.
Bata
Bata leads India’s organised footwear segment with a market share of 16 per cent. Strong brand equity, consistent financial performance and a robust distribution network have fuelled growth. Bata aims to add 40-50 stores this calendar year (CY14, versus 30 in CY13) and launch new products and marketing strategy.
Crompton Greaves
An earnings revival is on the cards as benefits of restructuring have started to be seen. While the industrial segment could take some time to revive, the consumer and transmission businesses could see better days ahead, led by better demand from user industries.
While its CV venture continues to struggle, given subdued volumes and high discounts, what keeps it in better shape than rivals is the strength of its balance sheet and the two-wheeler business. Supply of engines to Volvo’s global operations is a definite positive. Good performance of its Royal Enfield two-wheeler business (not impacted by slowdown) could see more demand if discretionary spends spike. Royal Enfield’s 23 per cent margins could see more upside from higher capacity utilisation.
Finolex Industries
Focus on the consumer business will expand revenue and margins, garner higher return on equity (RoE) and cash flows. "We maintain a 'Buy' on Finolex, considering strong operating leverage in PVC pipes, a de-leveraging balance sheet, improving margins and RoEs, and best-in-class receivables management,” said Prerna Singhvi, analyst, Religare Capital Markets. As Finolex has brought down receivables from 360 days earlier to 90 days and there is no major capex, the cash could be used for halving debt by FY16 (from Rs 839 crore in FY13) and increase dividends.
HPCL
Hindustan Petroleum will benefit the most from ongoing diesel price deregulation, with lower under-recoveries and better working capital. Interest costs form over 50 per cent of earnings. Removal of uncertainty regarding subsidy payout will also increase earnings predictability.
Jain Irrigation
Better receivables and inventory management are easing working capital pressure. This is also helping manage debt and earnings. Analysts are expecting earnings to grow at 58 per cent annually over the next two years. Revenues are expected to grow 14-15 per cent, led by export growth and domestic demand.
JP Associates
One of the largest infrastructure entities, JP Associates could benefit from a favourable policy push for the sector as many of its projects in the power, construction and other segments continue to face headwinds. Second, efforts to monetise a substantial part of assets and reducing of debt should help ease some pressure on earnings.
LIC Housing Finance
LIC Housing Finance is India’s second largest in the segment, well poised to gain from the low penetration of mortgages (eight per cent versus over 20 per cent globally). Strong parentage gives it access to low-cost funds, beside opportunities to leverage on the parent's high brand equity. Stable asset quality, healthy return ratios and a robust earnings profile are key positives.
Oberoi Realty
This Mumbai-based company is an outlier in a sector mired in debt, poor execution and shoddy managements. The company has in the recent past added to its land bank and, according to Edelweiss Securities, will reap the benefits of a positive cash flow cycle from some other key projects.
Persistent Systems
Persistent Systems is a play on the latest technologies such as cloud computing, analytics, enterprise mobility and enterprise collaboration. A differentiated business model, aggressive go-to-market strategy and healthy deal pipeline make it a favourite of analysts. Persistent’s strategy of acquiring its clients' non-core products is paying off well. The stock trades at 11.5 times FY15 estimated earnings and analysts see the scope of this rising to 13 times.
Prestige Estates
What stands out for this Bangalore-based property developer is the mix of development and rental income-based projects. Analysts estimate that development projects will, on an average, fetch Prestige about Rs 1,300 crore annually over four or five years, while its annuity assets will fetch rentals of Rs 500 crore by March 2015. Prestige is looking at a lower number of large projects to minimise execution risk and improve rental yields.