Midcaps reflect healthy growth rate: Anand Rathi Sec

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 Praj Industries BSE | NSE 01/06/12 Are Mutual Funds betting on Praj Industries? Other Stocks in this news Plethico Pharmaceuticals | Tata Elxsi |

Tarun Sisodia, Director of Anand Rathi Securities gives his take on a few of the midcap results that have come in and which could be called hits and misses. He thinks, Praj Industries valuations were fairly stretched, but the results were definitely a hit.

Q:  Were the numbers of Praj Industries a hit for you?

A: Praj Industries' had a topline of Rs 201 crore, which has a growth rate of 111% and they are excellent growth rate figures.

Margins have also been good at 13.7%, although, it's lower than what our analysts were expecting. They are lower by 1.5% and the main reason for that could be the new orders that came in at significantly lower margins, compared to the previous orders.

The bottomline is at about Rs 27 crore, which has also shown a healthy growth rate of more than 150%. We are expecting an EPS of Rs 16 in this particular stock, for the financial year ending 2008. That makes it about 29 times. So valuations are fairly stretched in this particular company right now, but yes the results were a hit.

Q: What about Tata Elxsi , you like those numbers as well?

A: Tata Elxsi is a very interesting set of numbers. About 25% growth rate for the quarter, and it's lower than the previous two or three quarters that we have witnessed.

Nevertheless, the numbers are healthy with a topline of Rs 39 crore. The margins have improved fairly from the rest of the year; they are at 24.4% compared about 22% YoY.

This significant improvement has taken place because of the company shifting from being a system integrator revenue mix, towards software development revenue mix. This is also where the margin improvement will come in, further down the line.

The bottomline at about Rs 16 crore has shown a growth rate of about 38%, reflecting higher margins. For this financial year, we expect an EPS of about Rs 23, ended March 08. At that level, the stock will probably trade at around 14 times, which is a very attractive level.

Q: Do you think Plethico Pharma 's numbers are on track to becoming a Rs 1,000 crore company in the next three years?

A: If you look at the results, the key factor is that the margins, on a standalone basis, seem to have improved a lot. But from our interactions with the management, the margins have been significantly lower. There are two segments where we are very bullish for Plethico; one is their CIS regional presence, which is a high margin business, and from a segmental perspective, the herbals is another high margin business.

Unfortunately, the growth rate in both these segments have not been as per our expectations. The topline growth rate is better than what our analysts expected, by about 10%, but due to the fall in margins vis-à-vis our expectations, we have a bottomline growth rate that is lower than what our analysts expected, by about 10%.

The results are extremely good and it is a hit, but vis-à-vis our analyst expectations, it is fairly neutral right now. But this is a September-ending company, so '07 earnings are expected at about Rs 32 crore and '08 are at Rs 45 crore. From a valuation perspective, it is a very attractive lead player and so we are fairly bullish on this company.

4: SEA Marine is a hit for you, but wasn't there a bit of margin contraction in this quarter?

A:  Yes and no. It had a margin, which used to be as high as 60% that fell down to 48%. But would you call 48% a bad margin, as a call? We are significantly positive on the company.

The company was operating primarily with 3 vessels and recently they acquired a fourth vessel for about Rs 70 crore. They made refurbishments expenditure of about Rs 80 crore, which is a total investment of Rs 150 crore.

The expenses are on, but the revenues are not, because the vessel is likely to get commissioned in June '07 and that would the reason for the margins being slightly on the lower side. But, Rs 56 crore of quarterly topline with 108% growth rate, 48% operating margins, Rs 24 crore of bottomline with 62% growth rate is a healthy number.

After refurbishing the fourth vessel, it gets the facilities for deep sea diving as well as laying cables. This makes it the only vessel of its kind, in this part of Asia. From June onwards, once it gets commissioned, there will be higher margins.

It is a December-ending company and this year we are expecting an EPS of about Rs 19, because only one half of the year would get reflected. But next year, we expect an EPS of Rs 24. So at current market price, it is trading at about 10 times and for next year, it will trade at about 8 times. It is an exciting valuation and the market value of the refurbished vessel itself, has reached upto Rs 300 crore. If SEA were to simply sell off the vessel, they will get Rs 300 crore where the market cap of the company is about Rs 680 crore.

Q: What is your call on the market now? What are you telling your clients after this phenomenal move, which has taken us back to the February all time highs?

A: Our main concern now is that the rupee has appreciated so significantly. It has been the single best performing asset class, for an investment in pure rupee. The technology stocks have also given guidance at about 43-43.1 level, as an assumption, which will take a significant beating down the line.

We don't see that impacting this quarter or the next quarter earnings, primarily because of the hedges. But it should definitely impact the second half of the year, in terms of earnings prospect. Technology contributes roughly about 17-18% weightage in Nifty and that is where we are really getting worried.

We are currently underweight on technology and we don't see much scope for further growth in the market from current levels. Infact, the downside risk seems to be significantly high at existing levels.

Secondly, if you look at the leverage positions, they have really climbed up quite significantly and probably breached the previous levels of May, when we last witnessed the crash of market.