These mid-sized cos are raring to go; Buy now

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Dipen Sheth of Wealth Management Advisory Services and TS Anantakrishnan of Prime Wealth Management here discuss midcap ideas that they like and dislike. Of these are Balrampur Chini, Radha Madhav, GE Shipping and others.

Excerpts from CNBC-TV18's exclusive interview with Dipen Sheth and TS Anantakrishnan:

Q: You like Balrampur Chini , what's the rationale for buying that stock now?

Anantakrishnan: Basically we expect sugar supply cycle to bottom out in the next four quarters. Essentially now with crude trading around USD 100/bbl, we expect there will be a greater diversion of acreage for ethanol production in the world, whether it be Brazil, where it be India.

Especially with Balrampur Chini, there is limited downside, where replacement cost of the assets is estimated around Rs 85-90. So given the limited downside, and the stocks trading around Rs 85-88 there's substantial upside in the sense that, you have sugarcane prices which have been brought down to Rs 1,110 per tonne. We expect potentially the sugarcane prices to be brought down to about Rs 900 per tonne. At Rs 900 per tonne, sugar margins should improve. Right now the current selling price is about Rs 13.50 per kg and that would imply an EBITA of 1.5 per kg.

So there is a quite a bit of an upside, it's a long-term play, it's a 18-month play. But given mandatory 5% branding, which we expect potential increase to 10%, given acreage production been diverted from sugar to other crops mainly wheat and given a delay in crushing, we expect the sugar cycle to turn to 18-24 months, which is why we are positioning ourselves in Balram.

Q: Why do you like Radha Madhav as a midcap idea?

Sheth: Well, Radha Madhav is a very interesting company because they are in the packaging business. This is a company, which went public about 2 years ago, at a Rs 10 premium. So, at the current market price of about Rs 110-115 or so, it looks like it has run its full course. But that is not entirely true.

They are rapidly evolving in terms of their product mix. They started off as a packaging films company and they went forward into custom solutions for FMCG packaging and they went forward into a slightly more sensitive area of food packaging. Now, they are going the whole hog and getting into pharma packaging.

The kind of stuff that companies like Bilcare or Ess Dee Aluminium have achieved, it is going to take a while before Radha Madhav evolves to that stage. But what I notice was that on an FY07 balance sheet size, the total capital employed of less than Rs 110 crore, they had already committed investments of over Rs 150-160 crore. But that is not going to happen in a quarter or two; it is going to take a year to pan out.

But the management seems very capable. I have spent some time talking with them and trying to figure out their product mix. I can already see a shift in their EBITDA margins. So, it gives me faith that the investment cycle they are entering into is going to be very positive for them, both in terms of margin expansion and obviously topline growth.

That is why we are backing this as a long term hold. I think you need to hold this stock over the next couple of years to really see it flower into its full potential.

Q: You like GE Shipping as well, why would you pick this one against another shipping stock?

Anantakrishnan: It's trading below its one-year forward NAV. The way we have projected the NAV of the assets, it's got 48 vessels, 36 in the tankers space, 12 in the bulk and they are looking to expand by adding four more new contracts and one second hand contract. It's also got an offshore division which has committed about 520 million over FY08-FY10, which will be a positive earnings trigger. The NAV of the assets is 540. Many global stocks are trading at 1.2-1.3 times the NAV, so based on that, we should expect a fair price of Rs 675.

Q: SICAL Logistics is another stock that you like, and would buy right now?

Sheth: It's actually an acronym for South India Corporation Agencies Ltd, which is what the original name used to be.

Now this is a company that has gone through a strong restructuring phase over the last two years. They have got out of non-core businesses, which ranged from coffee plantations to auto parts and so on. This is an integrated logistics player, and with the Mundra Port IPO coming up, this is the kind of stock, which is going to attract a lot of attention. And you might be surprised to know that they are probably South Asia's largest or maybe one of the largest people in terms of handling bulk cargo and containers, although they don't own assets as of now in a substantial way.

So they have long-term contracts with southern ports such as Chennai or Tuticorin and they handle close to 200 million tonnes of bulk cargo and maybe about 5 lakh containers per annum. They have a 500-strong truck fleet; they have another 2,500 trucks on hire, they are setting up an iron ore terminal which may be probably India's largest added iron ore in Ennore.

Over the last couple of years they have attracted investors like HDFC or IDFC to invest in them to a premium at a current market price. They are available for something like a marketcap of about Rs 900 odd crores today, and that's just about 1.5 times their core business turnover, which is going to see some substantial growth in future. You compare that with a player like Mundra, which is going to start the business by owning assets and this company, which is going to own assets over a period of time, somewhere people will notice the difference in valuations.

So this is again an ultra long-term hold; you look at the sector, it's probably the last of the big sectors, which is being privatised after telecom, roads, civil infrastructure, airports and so on. So ports is where the big action is going to come.

These guys are also planning to get into the dredging business; they already own offshore assets through a Singapore subsidiary called Bergen Offshore, it's a sum of many parts and somewhere it's going to add up way beyond its current market price they are at, about Rs 230 or so.

So you can work out the numbers and you can get into a detailed exercise. But this is something, where it's too obvious and you have to stay with this guy for a long time and just see the market doing justice to your patience.

Q: You are not very optimistic on TVS Motors , you would rather sell this one?

Anantakrishnan: Mainly because second quarter results were in line but with reduced expectations. We saw a 50% declined in motorcycle sales mainly because of an aggressive pricing strategy by Bajaj and Honda. Unfortunately, TVS doesn't have the balance sheet to adopt a similar competitive discount or can't give competitive discounts on products. So, the EBITDA margin plunged by 280 basis point to 2.4%.

We don't really expect, at least in this financial year, for TVS to do well. Potentially, if we get an interest rate cut, we might see pricing power come back in the financial '09, where you might see volume and EBITDA growth.

However, given the uncertainties in the industry revival, potential product launch delays, especially with the legal battles that they have with Bajaj on the two spark plugs and the three valve technology, I would avoid at this point and be cautious out here.

Q: What about Numeric Power , what is the story there?

Sheth: Numeric Power is actually highly underrated in the hidden gems out of Chennai, if you will. We noticed this company about a year ago when it was trading close to about half its current market price. What we noticed was that they had a leading position in the business of UPSs.

Now, you might say, what is the big deal about being in UPS? It is just a piece of electronic. But these guys have technology leadership; they are regarded as the number one player in this industry. They have foreign collaborations. Their products seem to get them annuity revenues in terms of AMC contracts. In fact, they even get into AMC contracts for other people's products.

That is an 80-90% EBITDA margin business. As the installed base of UPSs grows, they will keep on upping their annuity incomes. And that added by pricing power over the last year has resulted in not only topline growth, but margin growth too.

I am looking at something like Rs 70-80 earnings in FY08 and you are still buying it for less than 10 times '08 earnings, which is extremely cheap. This company is growing and it has got a sweet spot in terms of franchise that it enjoys in the industry. I would definitely back this one.