Even as fundamentals improve, the sharp rise in share prices of many midcap companies has made valuations expensive
With the market sentiment on a high, several companies, especially in the midcap space, have seen a sharp rise in their share prices accompanied by robust volumes in a very short span of time. In many of these cases, valuations are now looking stretched, which indicates that investors need to be more cautious and not assume that this dream run will continue forever. More importantly, the market too seems to be trading at levels where analysts expect a correction before it could move to higher levels.
In an exercise to figure out the stocks that have run up substantially, we crunched numbers and sorted the stocks based on return and valuation yardsticks. Stocks that have delivered returns of over 50 per cent in the last three months, over 100 per cent in six months and over 200 per cent in 12 months found their way into the list. By any measure, these returns are way in excess of the broader indices — the BSE Sensex as well as the BSE Mid-cap. To weed out the tiny companies, we took stocks with a market cap of over Rs 500 crore, sales of over Rs 50 crore and profit of at least Rs 15 crore. And finally, we looked at the valuation parameter — stocks with a PE of over 15 times. We got five companies. Read on to know what lies ahead for them as well as others.
Aegis Logistics
Aegis Logistics is a leading company in the oil, gas and chemical logistics business. Its stock got re-rated after Aegis acquired Shell Gas (LPG) India in December 2009, which gave the company presence in India ‘s cylinder market (and access to facilities in Pipavav Port in Gujarat). Further, the joint venture with Essar Oil to set up gas stations at its retail outlets has opened up opportunities. Aegis aims to increase its capacities, improve utilisation, expand network, enter commercial gas supply and roll out gas retail outlets, which should help it grow faster. Its plans to growth at 30-35 per cent over the next two years should reward investors in the long run. However, most of these positives are reflecting in the valuation (PE), which at 15 times the estimated FY11 earnings is not cheap.
Force Motors
Force Motors, a relatively small player, has benefited from the revival in automobile demand. The company reported a net profit of Rs 10.9 crore in the June quarter, as against a loss of Rs 6 crore in the June 2009 quarter. Force Motors operates in different segments of utility vehicles, including tractors. The company is now also looking to enter the passenger-car segment through a sports utility vehicle which will be launched this year. Along with the new launches and revival in demand, the company is expected to report strong growth in revenue and net profits this year. However, investors need to be careful as the stock has risen over 500 per cent in the last one year and now trades at 29 times its annualised June quarter earnings. That is far higher than the industry average as well as its larger and stronger peers.
Prime Focus
Prime Focus, which had contributed to the visual effects for 3D Hollywood movie Avatar, believes the global outlook is improving for its services in visual entertainment. It recently won orders worth $11 million from two Hollywood studios. It also wants to increase its capacities in India. Meanwhile, its share price has also moved up significantly in the last one year. The stock is trading at 26 times the FY10 consolidated earnings. High valuations along with high debt in the books and possible dilution (due to a planned QIP) could cap the returns from here.
| HIGH FLYERS | ||||||
| In Rs cr | CMP (Rs) | Market Cap | PE* (x) | Share price returns (%) | ||
| 3 Mths | 6 Mths | 12 Mths | ||||
| Force Motors | 964 | 1,270 | 16.4 | 144 | 155 | 511 |
| Prime Focus | 696 | 892 | 57.3 | 114 | 143 | 257 |
| United Breweries | 444 | 10,667 | 78.9 | 96 | 126 | 220 |
| V I P Inds. | 666 | 1,883 | 30.3 | 83 | 151 | 387 |
| Aegis Logistics | 362 | 1,135 | 26.7 | 51 | 104 | 338 |
| SOME OTHERS… | ||||||
| Polyplex Corpn | 854 | 1,365 | 7.7 | 220 | 300 | 358 |
| Jindal Poly Film | 1,059 | 2,437 | 12 | 162 | 187 | 253 |
| KIC Metaliks | 313 | 222 | 11.8 | 156 | 432 | 799 |
| Ester Inds. | 73 | 461 | 17.6 | 151 | 255 | 213 |
| Garware Polyest | 257 | 591 | 10.9 | 102 | 247 | 573 |
| Venky ‘s (India) | 963 | 905 | 12.7 | 102 | 177 | 465 |
| Vivimed Labs. | 328 | 334 | 9.8 | 79 | 118 | 251 |
| Parekh Aluminex | 516 | 668 | 12.8 | 76 | 238 | 369 |
| Riddhi Siddhi Gl | 458 | 511 | 7.8 | 63 | 113 | 232 |
| Sutlej Textiles | 259 | 283 | 7.6 | 62 | 118 | 209 |
| JVL Agro Indus | 420 | 540 | 14.6 | 54 | 267 | 252 |
| * Trailing 12 months, Source: Capitaline, Prices as on 7 October, 2010 | ||||||
United Breweries
United Breweries (UB) commands more than half of the Indian beer market on the back of well-known brands like Kingfisher. The stock has attracted investor interest on the belief that UB will benefit as a result of strong demand growth for alcohol, especially beer. The company ‘s sales in the last eight years have grown 10 times to Rs 2,275 crore in 2009-10. While UB ‘s long-term story remains compelling, its share price has almost doubled in the last three months. Based on the annualised net profit of Rs 76 crore (up 114 per cent year-on-year) for the June quarter, the PE works out to about 35 times, which does not leave any upside in the near to medium term.
VIP Industries
Of late, VIP has been in the news for the sharp surge in its share price. The company, which has seen its profitability improve sharply (from a loss of Rs 3.9 crore in 2008-09 to a profit of Rs 58 crore in 2009-10), has also attracted investors ‘ attention.
Investors have mopped up companies with a play on the domestic consumption story. Renowned investors like Rakesh Jhunjhuwala had also purchased substantial shares of VIP, thereby boosting investor interest. VIP is a dominant player in the domestic luggage industry, with a market share of 58 per cent. While its longer-term story seems to be good, its valuation (PE of 16 times based on estimated FY12 earnings) already factors in the company ‘s medium-term growth potential.
