Top midcap picks for today

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » RELATED NEWS Midcaps outperform as expected It’s been a very good day for the market Markets manage to bounce back from the lows 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 Allied Digital BSE | NSE 29/05/12 Are Mutual Funds betting on Allied Digital? Other Stocks in this news Honda Siel Power Products | Jamna Auto Industries |

Sejal Doshi , CEO, FinQuest Securities lists Jamna Auto , Honda Siel Power and Allied Digital among his top midcap picks. He likes Jamna Auto as they are essentially a market leader in the spring segment. Though right now they are predominantly domestic, they are going to tap opportunities in the exports market he added.

Doshi is looking at Honda Power more as a value investment as they are primarily leaders in the Genset segment and also doing pretty well in the engines and water pumps segment.

On Allied Digital, he like the transition of its business model. He is optimistic about the gradual and sequential margin expansion of the company and sees a CAGR of 65% in both, topline and bottomline over the next two years.

Excerpts of CNBC-TV18's exclusive interview with Sejal Doshi:

Q: You like Jamna Auto, there is a restructuring plan that the company has on the anvil. How do you view the stock and what is the target for the same?A: Essentially we like the story because they have undergone restructuring. The financial restructuring is over and right now they are on the verge of merging their group companies, Jamna Parabolic and all, so that they could leverage on the expanded capacity and consolidation of the operations.

What we have been looking into is more that they are essentially a market leaders in the spring segment. Additionally they are into both, leaf springs and parabolic springs. We are seeing that the demand for the series is certainly growing both in the domestic and the exports markets. That is where they will be benefiting in terms of topline. To capitalize on that they are going in for capacity expansion from 1,20,000 tonne to 2,00,000 tonne, over the next two years period when the capacity will get operational, that's where it will come in.

Secondly, we feel that whatever margin expansion is going to come is from the shift of the product mix, which is there from leaf spring to parabolic springs where margins are too high. Right now they are predominantly concentrating on the domestic markets. They are now going to tap the opportunities in the exports market.

So combine all these things I think over a period of 2009 and 2010 we are looking at 30-35% growth in their topline and over 100% growth in their bottomline, primarily driven by improvement in their lower interest cost and also by expanding margins.

So we are looking roughly at an EPS of Rs 10-11 in 2010. It's a slightly longer-term story and we are looking at an investment horizon of eighteen months with a target price of somewhere around Rs 85-90.

Q: What's the story with Honda Siel Power right now that came into the limelight when Birla Power is running up. Why do you like this stock and what is your target on it?

A: Essentially we are looking at Honda Power more as a value investment. The main thing is that they are primarily leaders in the Genset segment and also doing pretty well in the engines and water pumps segment. Another thing is that, apart from these segments, they are definitely growing at a steady pace of 10-12%, so we do not see any major upside on the volume front. But we are seeing some margin expansion here because firstly, the company is already indigenizing a lot of products, which they were importing and they are now trying to manufacture domestically.

Secondly, they are relocating their plant which was at Rudrapur to Greater Noida. Once this plant is relocated and they get economies of scale, they will see cost savings of at least Rs 5-7 crore a year on that front. So over a two years period, we will see margins expanding from 12 - 15% by 2009.

Right now, the company is sitting on huge cash on the balance sheet, which translates into around Rs 125 per share. If it's taken out from the current market price, and we are looking at the EPS of Rs 26-27 in 2009, the stock is hardly available at less than Rs 5 P/E. So that is the reason we are bullish on the stock and we are looking somewhere around Rs 350-370 of target over a twelve months period.

Q: What about Allied Digital at about 13 times one year forward, do you think it is fairly valued, why do you like the stock?

A: What we like more about the company is the transition of its business model. They are traditionally more of a system integrated player and their major revenue contribution comes from there. But the diversification which has come into areas like high margin remote management systems, network operating systems, security operating systems, we feel that the margin expansion is there.

If you go by their sequential numbers, we are seeing margin expansion and more revenues coming from that segment. No doubt IT as a sector is not doing well, but here we feel that the major reason for IT not doing well is the rupee appreciation. In Allied we see that 90% of revenue from domestic in rupee terms. So that concern is not there.

Secondly, what we are more optimistic about is that gradually, sequentially we will see a lot of margin expansions. We are looking at a CAGR of 65% in both, topline and bottomline over next two years. So maybe 13 times right now it's coming close, but we see that there's a lot of room left in terms of margin expansion, which could be much higher than what we expect going forward because the orderbook is full.

We feel that still, from hereon, it could give around 15% upside. But if we can see some shocks on margin side, the stock could go for more re-rating.

Disclosures:

We have been recommending all these stocks to our clients so we may have some positions on that and our clients also.