Aashish Tater suggests 2 midcaps ripe for picking

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Aashish Tater suggests 2 midcaps ripe for picking

Aashish Tater of Fort Share Broking is betting on Timken India and Honeywell Automation both from a delisting potential as well as strong fundamentals.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Honeywell Autom BSE | NSE 22/05/12 Are Mutual Funds betting on Honeywell Autom? Other Stocks in this news Timken India |

Aashish Tater of Fort Share Broking is betting on Timken India and Honeywell Automation both from a delisting potential as well as strong fundamentals.

On Timken India, Tater feels the company's annual revenues could grow around 25%, which is commendable in an environment where infrastructure and related spending in general has been on the decline.

On Honeywell Automation, Tater feels the stock should be valued around 25 times one-year forward earnings, as the company appears poised to report strong growth in revenues and bottomline.

Below is edited transcript of Tater's interview on CNBC-TV18.

Q: Let's start with Timken India, tell us about that one?

A: Timken is one stock that we have been recommending right from Rs 127-130 levels when the news for delisting actually came up for those 29 odd companies which could go for mandatory delisting. If I take a call on Timken India, we have seen that there is a strong support around this Rs 160-odd mark and there is a strong resistance around Rs 240-odd mark.

So technically if someone is buying, the weak hands should sell around Rs 230-odd mark. Now taking a call from a delisting perspective itself, we feel that the stock should be delisted around at least Rs 300. The first rationale that we feel is that 80% is owned by Timken USA and going through their recent acquisition of Philadelphia Gears, they have paid a market cap to sales ratio of almost 2.5 times. On USD 80-85 million dollar sales they have paid roughly USD 200 million.

So from that math if I see that for the next year the company is going to do sales of close to Rs 780 crore, this year they would be doing close to Rs 640 crore which is still 25% year on year higher in a market which is actually not showing such a great momentum in terms of infra spending and related infrastructure spending. But Timken has done exceptionally well in its bearing business.

Thus, we feel that this momentum would go further. Now, the company has been always rewarding its shareholders. From that angle also, we feel that on Rs 780 crore of sales, they would pay roughly Rs 2000 crore of which 80% is owned by the parent itself. So, for the remaining 20% they would pay roughly around Rs 400 crore which is peanuts for the company. Now taking a fundamental call, we had a target of close to Rs 75 crore of profit for this fiscal, but we have reworked our math close to Rs 70 crore.

For next year we had an aggressive target of Rs 93 crore in terms of bottomline but we have again shifted it to close to Rs 84-88 crore. So even on Rs 84-85 crore it would be roughly trading at Rs 2000 crore market cap, close to 27-28 times which has been going good for US companies who have looked for delisting, Astra Zeneca offered Rs 1200 per share, Atlas Copco offered Rs 2750 per share.

Eventually Atlas Copco got delisted. So from price earnings multiple we have to think from the parent's perspective and this is one stock where I feel there is lot of safety in terms of downside during this particular period till June 2013. We foresee that this particular stock on our probabilistic model for eventual delisting is improving on quarter-on-quarter basis. This shows clear accumulation on the charts.

Thus we feel fundamentally, technically and quantitatively--from all these three angles--the stock is a good buy at current levels for a delisting target of Rs 300 and weaker hands should at least book out 50-70% of their profit between Rs 220-240.

Q: What about Honeywell Automation ? Why do you like that story?

A: If you see Honeywell Automation, it is also from Honeywell Inc, of US parentage. This is one company which is doing exceptionally well except for this year where they have booked out some long term payments to their parents. The company would do roughly around Rs 100 earning per share. That roughly works out to a PE multiple of 17 times. I was going through US analysts' reports on the parent itself. They have upgraded the stock with a target price of USD 55-56.

They put that same (price) into the model that I use, annualized equivalent value. It roughly works out to be 12-13%. The current enterprise annualized equivalent value for this particular company is around 19%. The parent company has been very focused on increasing its EPS.

So they would not mind paying the company and then bringing in more products from US to the subsidiary because here it is (a) very cost efficient, (b) if you look the way Honeywell has actually grown over last five years, they have given a CAGR of over 26%. If I see from this angle, the stock, once the delisting is announced, should be hovering around Rs 2600-2700. Once the delisting process actually ends, the stock might test and eventually de-list at around Rs 3500-3700.

It's a one year time-frame where you have got limited downside and again a tremendous potential upside on to the stock. Now take a call from the parent's perspective again; the stock is available at a PE of 17 times for this year because they have booked out some Rs 10 crore in the last quarter and that's why you saw subdued results for the last two quarters. Similar story happened in Atlas Copco but the stock was paid a 25-27 PE multiple based on higher earnings projection for next two or three years. So when I was using this projection for Honeywell Inc., they have again the potential to grow by 25-30% year on year.

That means again the company would be doing an EPS of close to Rs 130. So take a multiple of 25 times in good times, the stock should be hovering around Rs 3300-3500 on the conservative side. Looking at scarcity premium, we feel the stock should be delisted between Rs 3500-4000 and we have a target of Rs 3700 from a one year perspective. So a very safe bet, limited downside and potential upside of almost 100%. But yes, weak hands should again exit 50% of their profit around at Rs 2650-2800 mark.

Disclosure: We have firm wide interest in the stocks discussed. No personal holding but stocks have been recommended to clients.