Speaking to CNBC-TV18, SP Tulsian of sptulsian.com said that his top midcap picks are Amara Raja Batteries and KCP.

Tulsian has chosen Amara Raja as the company is diversifying into telecom and two wheeler batteries. He added that considering the low equity base, book value and turnover of more than Rs 1,000 crore, which is expected for FY08, the stock will give good price appreciation.

The other pick that he liked was KCP, as it has dramatically turned around and has been showing excellent performance, for the last two-three years. The company has a cement plant in Andhra Pradesh of five lakh tonne, which is already operating at more than 120% capacity. They also have two engineering plants, which is the growth driver for the company.

Excerpts from CNBC-TV18’s exclusive interview with S P Tulsian:

Q: Why do you like Amara Raja Batteries and what is your target on it?

A: Presently, Amara Raja Batteries is into automotive and industrial batteries. They have a capacity of four million pieces and that is giving good profit. Now, they are diversifying into telecom as well as two-wheeler batteries, which is a growing market, with an additional capacity of four-five million pieces and a capex of about Rs 260-270 crore.

The best part about this capex plan is that there will not be any equity dilution. The equity is very low at about Rs 11.5 crore, of which 52% is held by promoters. The company had 40% CAGR in the last three years, with a bottomline growth of 210% in the last three years. The management indicated a CAGR of 35%, over the next three years, on topline and bottomline.

With regard to the battery business, out of the raw material cost consumed by any producer, 70% is the lead price. The lead price, which had a peak of USD 3,950 per tonne about 6 months back, is ruling at around USD 2,600 per tonne. That is the indication that lead prices will probably remain in that range.

In case, the raw material price of lead falls, the company is obviously at an advantage by way of inventory holding.

Equity is about Rs 11.5 crore and the networth of the company would be more than Rs 300 crore in FY08 and for FY09, it will be more than Rs 400 crore. Considering the low equity base, book value and the turnover of more than Rs 1,000 crore, which is expected for FY08, it will give good price appreciation.

The expected EPS for FY08 is about Rs 15 and for FY09 it is about Rs 20. That means the share is discounted at a PE multiple of close to Rs 13 and 10, which leaves room for further expansion in PE multiples.

So, I expect prices to touch about Rs 300, in about 6-9 months time. Presently, the share is ruling close to Rs 200, at Rs 196.   

Q: The other stock that you are recommending is KCP , from the sugar space. They are expanding business there, looking at real estate investment, sitting on surplus land and it is a debt free company. Also, you are talking about promoters holding 46% on a low equity base. What is it that you like about the company and its prospects? What is the target that you are setting on this one?

A: KCP is an interesting company, having dramatically turned around and has been showing excellent performance for the last two-three years. This company has a cement plant in Andhra Pradesh of five lakh tonne, which is already operating at more than 120% capacity. They are producing about six lakh tonne and they also have the power generation capacity of about 12 mw, which is used for captive consumption. Over and above, they have two engineering plants, which is the growth driver for the company.

If you see the present revenue breakup of Rs 300 crore, 50-50 is coming from cement as well as engineering. But the growth plans which they have, going forward, is about 60% growth in the coming year i.e. for FY09, from engineering division and they expect a topline of about Rs 250 crore.

So, based on H1 results, FY08 should be able to give an EPS of Rs 70, while FY09 should be able to give an EPS of Rs 100. The best part is that the company has two pieces of land; one at Chennai, which is to the extent of about 40 acre, in which they are exploring the possibility to convert that land into the container freight station. That will be a big revenue earner for them. The 4-acre of plot, which they have in Hyderabad, is intended to be developed into a five star hotel, which will be leased out to any hotel chain for operation and maintenance.

So, their main focus has been engineering. Cement has been giving them good profits and realizations. The book value is quite robust and the dividend payout hovers about 100%  FY07, which is likely to get enlarged to about 150%

The company has a subsidiary in Vietnam. In Vietnam, the sugarcane prices are lower, while the realization is higher. So, that subsidiary alone can give them a profit of about Rs 12-15 crore, which would translate into an EPS of close to Rs 10. So, if I take an overall call, Rs 70 EPS for FY08 and Rs 100 EPS for FY09, the share is now ruling at Rs 600 or maybe Rs 620, which discounts forward earnings close to six times, which in fact is low.

 If you take any engineering stocks, they are ruling at a PE multiple of Rs 15-20. I may not be taking that kind of multiple, but even if you take a multiple of 10-11 shares, it has the potential to cross the four digit mark of at least Rs 1,000 in the next nine months.    

Disclosure:

I am not holding and and do not have any interest in both the stocks.