Midcap ideas: Kimeng Sec picks M&M Financial, Petronet LNG

Houseviews: Three stocks that brokerages are bullish on

Below is the transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Why do you like Mahindra & Mahindra Financial Services?

A: Mahindra & Mahindra Financial Services is able to defy the current slowdown in the auto sector. Its expansion of the distribution network, gaining market share in the car and the truck segment, the new trucks as well as the used trucks segments, is behind its loan growth of 25%. The auto sector growth will be 10-12% this year.

Apart from that, their rural housing business also doing very well and is likely to increase loans by almost 100% in the current year. So, we feel that Mahindra Finance is quite well place to grow the revenue.

On the margin front, the cancelation of the priority sector loan advantage will take away about 20 bps of net interest margin. But we feel that overall earnings growth will be still good at 18-19% for FY12. So, based on a price to book of two-and-a-half time, we have set a target price of Rs 732 for the stock. We believe that that is well justified by return on equity in excess of 21%.

Q: What kind of target price you have on JBF Industries?

A: For JBF Industries we see a target price of Rs 220 on a modest PE ratio of four times for FY12. We are forecasting Rs 55 of earnings for the company this year, which is down year-on-year. But we should not forget that FY11 was a huge year with earnings rising three times as compared to FY10. So, overall we feel that the stock is quite undervalued, especially when the spreads from polyester yarn as well as from pet films have remained steady. We expect very robust Q1 earnings, which will be announced this month.

Q: Why are you bullish on Petronet LNG?

A: Petronet LNG offers a strong bet on the consumption of gas which is rising in the country. Expectation is that the current demand will double to 400 million units per day by 2014-15. So, considering that and the domestic gas is in shortage, Petronet LNG is in advantageous position. It is expanding quite rapidly, should double the capacities in another two to two-and-a-half years. We forecast that earnings should rise by 30% in the current year, given their ability to increase the volumes and very stable margin. So, we feel that the stock is undervalued at current price earning ratio of 12 times. We see a price of Rs 165 based on PE ratio of 16 times for current year.