Standard Chartered is betting big on midcap and smallcap companies for long term investment on following reasons. 1: Under-researched stocks = Higher returns. For similar improvement in RoEs, under-researched stocks have generated better returns. The Indian small/mid-cap (SMID) space has also produced the maximum number of 10 baggers over the past decade in the region. 2: It’s not just beta. Post global financial crisis, correlations of the BSE mid-cap index vs the Nifty has been falling while RoE dispersion within the SMID space has magnified3, making stock selection more important. 3: Alpha generation. Macro-economic cycles can be played via sector rotation strategies, but stock selection can be a dominant performance driver between cyclical turns4. So, check out the stocks:
Aditya Birla Nuvo Target: Rs 1,465 Rating: Outperform Rationale: The company is transforming itself from an asset aggregator to an asset allocator. Recent management decisions suggest a focus on improving portfolio returns. Multiple catalysts ahead: (1) new banking licenses, (2) improvement in telecom tariff, (3) turnaround at Pantaloons and (4) asset sales. We have not assumed upside from these in our base case valuation.
Motherson Sumi Systems Target: Rs 270 Rating: Outperform Rationale: The company is evolving into a preferred full-system solutions provider for global OEMs. With the bulk of its capex behind, the management is expected to focus on executing its robust combined order backlog of EUR 3.8bn at SMP/SMR.
Amara Raja Batteries Target: Rs 325 Rating: Outperform Rationale: The company is well-placed to capitalise on growth opportunities, given leadership in the telecom/UPS segments and strong No. 2 in autos. Driven by sustained demand in both the auto and industrial segments and improved pricing power, Amara Raja is expected to post an 18% earnings CAGR over FY13-15E. Valuations appear favourable post the recent correction, given robust earnings growth, strong return ratios and negligible leverage.
Mindtree Target: Rs 850 Rationale: Pedigreed promoter-management team, strong clientele and a defined dividend policy differentiates it from other mid-cap IT services players. FY14 margin management is the key challenge; pick up in Product Engineering Services demand (31% of revenue) + new large deal wins are key upside risks.
Indraprastha Gas Target: Rs 451 Rating: Outperform Rationale: Its sales volume trajectory is likely to pick up, led by the introduction of 2,500 buses and 45,000 new autos. The year-long suspense on the IGL-PNGRB case is to end soon as the Supreme Court hearing nears completion. The Supreme Court order will be a key trigger and the court is expected to uphold the Delhi HC order and keep pricing to consumers outside regulatory control.
Gujarat State Petronet Target: Rs 94 Rating: Outperform Rationale: The current price factors in extreme pessimism of (1) c.22 mmscmd volumes (same as 4QFY13) over the next two years, (2) conservative tariffs of Rs 850/tcm to perpetuity and (3) sub-par returns on cross country pipelines. GSPL’s core Gujarat transmission network value would largely be intact as take-or-pay aided tariff uptick would largely compensate for weak transmission volumes; to generate 12% post-tax adjusted RoCE.
IRB Infrastructure Developers Target: Rs 233 Rating: Outperform Rationale: It is the dominant toll road operator in the high-density, high-growth corridors of Gujarat-Mumbai and Mumbai-Pune. We expect its toll collections to grow 2.5x over FY13-17E to INR 35bn. Strong in-house EPC capabilities and a healthy balance sheet place it in a leading position in the road space IRB has picked up pace in 4QFY13: (1) traffic grew 5-10% across all key projects, (2) two new projects commenced tolling and (3) it guided to three more ongoing projects becoming operational in FY14.