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Midcaps that are screaming `buys'

Published on Thu, Aug 31, 2006 at 10:12 | Source : Moneycontrol.com

Updated at Thu, Aug 31, 2006 at 12:04

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While the market is doing the catch-up game allowing midcap stocks to become the darling of investors, it is not too difficult to fathom why 272 out of the 290 BSE midcap stocks moved along with the market's resurrection and are trading in the green. So can the phenomenon be attributed to return of punters as midcap and small cap stocks are generally punter-stocks.

However, there are 18 midcap stocks, which have moved in the reverse direction between June 14 2006 and August 24, 2006 --- the period when the market took a U-turn. Dhampur Sugar , Ruchi Soya , Britannia Industries , Shree Renuka Sugars etc are some of the known midcap stocks which have not made any gains during the market's recovery.

While speaking to CNBC-TV18, Nilesh Shah of Prudential ICICI, argued that stocks in which one had comfort with the management and the business plan, recovery was much faster and most of them have reached above their fair value. At the same time, in a couple of midcaps where the prices have not yet moved, one really does not have that much comfort. The recovery story has been very strong for certain midcaps like Kesoram Ind , GHCL, Jagaran Prakashan, S. Kumars, Deccan Chronicle have either quoting above their May 11, 2005 prices or have almost reached that level. Experts say the only reason behind midcaps' rise is that when the market crashed, most of them got battered so badly that they were trading at very cheap valuations. The midcaps that were trading at premium valuations to large caps till the market crashed had started trading at a discount after the market crash.

On Kesoram Industries in particular, Ketan Karani, VP, Research, Kotak Securities told CNBC TV18 that "it is a clear-cut cement play and a tyre play. Kesoram is expanding its cement capacity to USD 4.65 million, which is again proving to be very EBITDA and net profit accretive. If you look at the results of the quarter, the company had a full year FY06 net profit of Rs 45 crore, whereas in the first quarter, they have reported Rs 63 crore of net profit."

He says that he tyre side, which was not so positive for the entire industry, was quite positive for Kesoram. "It is again happening in favour of Kesoram because other commodites have stabilised whereas tyre prices have gone up by 3-5% and are expected to go by another 3-5% in the near future also. So we believe that Kesoram, on a diversified play, cement and tyre should be a very comfortable play."

Karani believes that cement and tyre should give a boost to Kesoram in earnings in future too. Kotak Securities expects Kesoram to report around Rs 40-45 for this year and with the expansion in place by this year, the cement play would let the earnings grow by another Rs 55-60 in next year. "So on a valuation basis, we believe Kesoram should be rightly priced on Rs 550-600 within one, one-and-a-half year perspective," he justifies.

But most of the stocks are yet to reach their May 11 highs.

On Page 2: 18 stocks that are yet to recover

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