Hot midcap picks from PINC Research

Excerpts from Midcap Radar 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 Cholamandalam BSE | NSE 30/05/12 Are Mutual Funds betting on Cholamandalam? Other Stocks in this news Dwarikesh Sugar Industries | RSWM |

Speaking to CNBC-TV18, Sandeep Shenoy of PINC Research said that his top midcap picks are RSWM , Dwarikesh Sugar Industries and Cholamandalam DBS . Shenoy said that RSWM is a good growth company and value unlocking is possible from its embedded holding.

 

Dwarikesh Sugar is a pick if some positives come in the sugar business, then the operating leverage could be much higher. Cholamandalam DBS will be a premium stock in the days to come with a high growth potential.  

 

Excerpts from CNBC-TV18's exclusive interview with Sandeep Shenoy:

 

Q: A lot of analysts believe that the rally we have seen in December for the midcap index and the smallcap index has almost caught up with the kind of rally we saw on the benchmark indices in the months gone by. Are you also in the camp that believes that the rally is now capped and we probably may not see so much of outperformance?

 

A: Outperformance is not going to be on an index basis, but on a specific story basis. One could see a marked outperformance. So, the quest is always there for finding the next good midcap, which could outperform both the indices.

 

Trying to figure out a way whether money will flow out from the benchmark indices, the Nifty and Sensex to the midcap IT, is going to be a futile exercise.       

 

Q: There has been a story of embedded value in RSWM. Bhilwara Energy is the company everybody is betting on from hereon. What is the risk and the argument in favour for RSWM?

 

A: On an operational basis, the company has been weighing out some of the assets. So, on a lean and mean basis, spindle is also increasing by almost 20% from 3,80,000 to 4,60,000. Power is also coming in its backend, the cost will also be rationalized and be more predictable.

 

The margins of its operational business is definitely going to be stable and give some kind of a buoyancy to the stock price at the lower end. The embedded valuation, which could accrue from the energy business, which they are scaling closer to around 1,700 MW by another four-five years.

 

So, that gives some kind of a value unlocking potential for the stock. At the last dilution, it was somewhere close to Rs 170 per share and if the second round of dilution happens, it could be substantially more. So, it' is a good growth company with operational business plus value unlocking possible from its embedded holding. So, that is what makes it a good buy.       

 

Q: What is your view on Dwarikesh Sugar and the entire sugar pack, at this point in time? What is happening with the UP mills and the SAP gap being measured? What is your sense of how sugar companies or how one should look at sugar companies right now and Dwarikesh Sugar in particular?

 

A: These type of companies probably leave some kind of a huge amount of margin of safety on the table. Considering this kind of a scenario, sugar losses could be around Rs 6-7 crore and probably next year also.

 

But with respect to the power business by January, we feel it should be closer to exporting maybe around 48-50 MW of power to the grid. It should come close to reporting an EPS in excess of Rs 13-14 or maybe closer to Rs 15.

 

 So, the sugar business notwithstanding, if some positives come in the sugar business, then the operating leverage is going to be much higher.

 

Q: What kind of an uptick would you expect, in terms of a target price for Dwarikesh Sugar, from hereon?

 

A: All things being constant, the power project stabilizing by January-February and operating for a 200 days a year, one will have something like 75-80% left on the table. Its going to take time but people are going to appreciate these kind of earnings from these type of companies and are going to give it a thumbs-up at a premium valuation.

 

Q: Give a quick call on Cholamandalam DBS. The stock has flaired smartly and they want to become a complete one-stop financial services provider from hereon. It is at a Rs 315 life high today. Where does it go?

 

A: I think the entire sector is in a thrush of rerating. It started with the large players. So, all the players in this sector are going to do well. Chola has the highest scalability potential at the current level because it can push its balance sheet across USD 2 billion in the next 12-15 months.

 

So, when you are growing up, the market is growing up and your ability to draw deeper into the lower end of the market by giving loans to the segment, which no banks want to give. So, the NIM could be high, averages could be closer to 20% or 18-20% in that range.

 

That leaves something like 50-60% growth on the earnings front for the company. It is not a cheap stock, but on the price to book value basis or on a PE basis, the scalability potential is immense and also the expertise brought out by the parent company DBS and the commitment by that to this company. I guess it is going to be a premium stock in the days to come with a high growth potential. So, that is going to ensure that this company is going to be an outperformer.     

 

Disclosure:

 

I think RSW and Dwarikesh Sugar are our portfolio stocks. But you can deem us to be interested in all three and we have a vested interest in markets going up.