As the Indian market continues to remain volatile and the front liners bearing the brunt of uncertain economic conditions, investors may now look forward to midcap counters to dwell on short-term performance.
Aashish Tater, Head of Research of Fort Share Broking, in an exclusive interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee, said that one should stay "cautious" while taking positions in this space. "The sector is heavy and has witnessed sequential lacklustre trade. In the short-term, high interest rates would hamper these companies' growth," he added.
Below is the verbatim transcript of his exclusive interview. Also watch the accompanying video.
Q: How are you reading the midcap sector?
A: Firstly, in the midcap space, I have a 'cautious' call as this sector is getting heavy, followed by consequent lacklustre trading sessions. Hence, it's difficult to make money in the short-term. However, the following picks should be looked with a slightly long-term horizon and can be added in small quantities. We are ignoring companies with debt because the cost of interest will hurt bottom-line performance. Thus, high interest rates would hamper midcap companies to grow significantly in the current macro situation.
Q: What’s your call on Savita Oil Technologies?
A: According to the company, its product ‘Savsol’ is likely to add 125cc plus engines. Hence, the company was in limelight right from 2009. Since last year, the stock has not performed at all. We have been tracking this stock right from Rs 280-300, a large part of momentum was achieved in 2010 itself, and since then the stock has been lacklustre because almost 72% is owned by promoters.
Fundamentally, the company reported robust earnings per share (EPS) of approximately Rs 75, backed by Rs 20 dividend which includes a special dividend as the company celeberated its 50th anniversary. Thus, it a lucrative bet with a long-term perspective.
They produce sensible products, which are vulnerable to petroleum prices. Any fast movement in crude oil prices, say USD 20-30 plus minus from current levels, would have exposure to their raw material cost as well as their inventory carry over trade. However, on crude prices, it would either be positive or would be range-bound between USD 90 and USD 110 for Indian basket from next one-year perspective. I have a modest growth target for the company at 16% CAGR right from 2009, but they have beaten my estimate every time and this year also the company has posted a robust EPS of almost 30% higher than what I forecasted.
So here is a company, which is going to do an EPS of close to Rs 83 on conservative side for next year. It will be available around Rs 530-540, giving Rs 20 dividend this year and I expect even Rs 50 dividend for next year, mean cash flow of Rs 35 from two years perspective. This can be bought with a longer-term view. However, one should monitor this counter from quarterly result perspective, and not take large positions.
Q: How will you trade Ineos ABS?
A: The parentage is Ineos ABS (Jersey) limited; this counter is attractive because it has zero debt. A comfortable cash flow positions and could be a delisting candidate. Now for a de-listing candidate, the company has to not only abide by 75% rule by taking proper steps, which has been ignored as of now by many players into this listed area, but they have also got this arrangement with BASF for their new product ‘Styrolution’. The company projects close to 5 billion euro of sales for next couple of years, which means USD 6.5 billion sales, of which even Ineos ABS (India) is a part. Approximately, Rs 1000 crore would be contributed from Ineos ABS itself.
On fundamental basis, the company posted an EPS of close to Rs 40 and is available at a price of close to Rs 480-500. Now, on account of its joint venture with BASF of the parent, the company might go for delisting. We have a target of Rs 650 with 306 months horizon. Since the parent company would be looking to delist the stock, this counter can even give you Rs 800 on upside. Also, there is hardly any downside risk involved.
One can comfortably enter this stock around Rs 460, at 11-12 P/E multiple, and a parentage of Ineos and giving a growth in terms of bottom-line of close to 30% for next year. This is one bet which people can take a shade on in the midcap arena from a medium-term perspective. Thus this is safe bet relative to other midcap areas, where there are positions with high leverage from midcap management side.
Also read: SP Tulsian's view on Deepak Fertilizers, Suzlon, Muthoot Fin
