These Eight Mid-Cap Stocks Are Hidden Gems, According To Ambit Capital
Indian mid caps have had a blockbuster year, outperforming the benchmark indices. The S&P BSE Midcap index has risen 37 percent this year buoyed by improving local macroeconomic conditions and the government’s reform initiatives. Increased participation from domestic investors looking to park excess cash post demonetisation also pushed equity benchmarks higher.
Amid this trend, a local brokerage Ambit Capital has picked out eight lesser known stocks that it calls ‘India’s Emerging Global Champions’. These stocks have the potential to become global leaders in their products or niches, Ambit said. The brokerage filtered the top 1,500 listed companies under its coverage, removed the first 100 by market capitalisation and assessed the remaining stocks before selecting eight.
Ambit’s analysis takes into account the companies’ demonstrated growth, focus on development of key products, success in globalisation, quality of distribution, ability for innovation, competitiveness, financing, corporate culture and their leadership.
Here are Ambit Capital’s picks and the reasons for their bullish outlook.
Cost-control, a debt-light balance sheet and a “prudent” approach to capacity expansion has helped Graphite India Ltd. survive the slowdown in the graphite electrode industry over the last seven years, Ambit Capital said.
- The company did not report any losses during the slowdown and “has remained one of the few survivors in the industry”.
- In the three years to 2017, Graphite India’s operating income has remained positive, despite a compounded 10 percent annual decline in revenue.
- “Judicious” capital management reduced debt from 0.8 times its equity in 2008, to 0.1 times its equity currently.
- The company will benefit from the anti-dumping measures on import of graphite electrodes from China as it will lead to countries looking for options elsewhere.
- The brokerage expects its multiples to grow to 26 times its earnings per share by 2019.
A global supplier of carbon products like calcined petroleum coke and coal tar pitch, Rain Industries Ltd. is in a favourable position compared to its peers, said Ambit.
- The company will benefit from its long-standing relations with customers and suppliers.
- Proximity to raw material sources and diversified product offerings have added to the company’s success.
- The capacity shutdown by its key competitor, Koppers is likely to strengthen Rain Industries' positioning in the tar distillation business.
Greenlam Industries Ltd.’s focus on improving margins, cash flows and balance sheet is likely to play out well for the company keeping its “multiples rich”, said Ambit.
- The company’s export revenue has jumped to 44 percent of its total revenue in 2017 from 15 percent nine years ago.
- “Accurate brand positioning”, distribution network and region-specific product portfolio drove Greenlam’s success in international markets.
- Greenlam’s engineered wood floorings business is expected become profitable in the next two years on the back of the management’s commitment to deliver quality and strong distribution.
- Focus on margin improvement should drive the multiples to 26 times earnings per share.
India’s largest exporter of basmati rice captures 25 percent of the market share globally. KRBL is better placed than its peers to tap opportunities arising from easing import restrictions in Iran and China, Ambit said.
- KRBL’s practice of building inventory during the times of low rice prices has given it a competitive advantage.
- Early adoption of PUSA 1121 seeds, which are higher yielding and have shorter maturity time, helped establish its base.
- KRBL has also maintained stronger farmer relationships through end-to-end management of grains.
- Years of experience and aggressive advertising have led to a successful brand.
- Additionally, the company has developed long-term relationships with distributors in its key Middle East markets.
Lakshmi Machine Works
A global supplier of textile spinning machinery, Lakshmi Machine Works Ltd. is expected to benefit from the revival in the global investment cycle, said Ambit.
- The Indian government’s measures like reduction in the Goods and Services Tax rates, and implementation of programmes like Integrated Skill Development Scheme will boost sales and encourage capital expenditure.
- Investment in research and development, client management and cost effectiveness has made it a market leader, according to Ambit.
- It has a debt-free balance sheet and posted a compounded annual export growth rate of 42 percent in the six years till 2016.
- The company is well placed to gain market share but faces imminent risk from the cyclicality in the industry.
- The brokerage expects multiples to grow to 25 times earnings per share in 2019.
Air-cooler manufacturer, Symphony Ltd. has an asset-light business model focused on innovation, branding and geographical diversification, Ambit said.
- The single-product, debt-free company is in a comfortable position with nearly 50 percent share of the organised air-conditioner market in India.
- Policy to reward shareholders by maintaining a healthy divident payout ratio and cost conscious operations has led to greater confidence among stakeholders.
- Symphony can become a much larger brand with its recent successful acquisitions and strong balance sheet.
- The risk lies in excessive dependence in India which is becoming a competitive market for air-conditioners.
- The brokerage expects multiples to grow to 40 times earnings per share in 2019, which is “expensive, but manageable”.
Focus on greener chemicals, perseverance to build a global brand and attention on quality and safety management are key success factors of the chemical-maker, according to Ambit.
- The expansion into paracetamol intermediate and IB derivatives will assist business growth.
- Being the sole manufacturer of vinyl polymer Acrylamido tertiary-butyl sulfonic acid in India gives it a competitive edge.
- Vinati's earnings may triple over the next five years with its approach of scanning for disruptive processes straight out of academic research.
- Ambit expects Vinati's multiples to increase to 27 times its earnings per share in 2019.
Essel Propack Ltd., a global manufacturer of aluminium and plastic laminated tubes, has recently ventured into non-oral care segment, thus maintaining a diversified business model for further expansion, Ambit said.
- EPL is fast expanding its non-oral care business, with 42 percent market share in 2017, as per Ambit’s calculations.
- The operating profit of EPL has improved by 210 basis points between 2012 and 2017 due to value-added product launches in laminated and plastic tubes’ business growth and greater capital allocation.
- Greater innovation, wide portfolio offerings and extensive global reach have rendered a key competitive edge.
- The brokerage expects a pick-up in EPL’s growth in the second half as GST-related issues abate.