Mixed Q4 for mid-caps: top picks from Equirus

Bhavin Shah, CEO of Equirus Securities picks Apollo Tyres as a preferred stock, based on its Q4 results. In an interview with CNBC-TV18, Shah said that the company exceeded expectations. "Even without any multiple expansions, the stock can move up from here, from Rs 80-82 to about Rs 100," explained Shah.

However, Shah is disappointed with the performances of Sintex and Arvind Mills. Meanwhile, Equirus Securities also holds a short rating for Asian Paints, despite its good numbers in the fourth quarter. 

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: Let me start off with the miss first - Sintex. You didn’t like what you saw this quarter?

A: Q4 is traditionally their strongest quarter. Revenues were 23% below our expectation, EBIT also 20% below expectation. If you look at the company on a year on year basis, this is a very sharp decline in revenues and profits.

Basically, the custom molding as well as the monolithic businesses which is basically catered to the low income housing and lot of government projects, has been hit in the fourth quarter. Given the condition of fiscal deficit, it is unlikely that those businesses, especially the monolithic business, will recover in the near term. Yes, it was a significant miss.

Q: Even Arvind Mills - the operating performance did not look great. Were you disappointed and where do you see the stock heading now?

A: Revenues of Arvind Mills were broadly in line with the operating performance. EBIT was 45% below our expectations. What was surprising is that inspite a fall in rupee, their margins in the textiles division went down sharply. Also in the retail business, even though the growth was very strong, the margins are turning out to be very low.

What we have been expecting is some sort of a transformation to more of a brand business. I don’t think it is happening as expected. They are not really able to manage the textile business as well as one would have thought because of the inventory write off. There was a fuel cost increase that also affected them because of a lack of supply of gas. But, the inventory write off was something not to be expected.

Basically, it affects the whole thesis of the company’s revival in terms of where this stock could go, for one who doesn’t expect meaningful upside from here. However, if you apply some simple price to book kind of measures, the stock is reasonably cheap.

If the market conditions improve, the stock can move back close to about Rs 100 but, it is for very risk seeking investors at this point. The confidence in the company to really manage a transformation has been dented.

Q: Among the ones you liked this quarter - Apollo Tyres.

A: Apollo Tyres is benefiting from stability or even a slight fall in the rubber prices. On the volume front, especially in the India business, picture continues to hold pretty well. In fact, the margins of Apollo Tyres were 100 bps above our expectations.

We think that the margins for FY13 will show improvement. As a result even with somewhat muted volume growth, given the overall outlook for the demand especially for passenger cars, with maybe 10-13% revenue growth, their earnings can grow close to 30%.

Apollo Tyres is certainly valued very reasonably at 1.5 times price to book with the company generating close to 20% RoEs. Even without any multiple expansions, the stock can move up from here, from Rs 80-82 to about Rs 100 in our view.

Q: You like Asian Paints’ numbers as well. But, there is some discomfort on whether it can still be bought at this price. You would say there is still upside?

A: We actually are short; our rating is short on the stock. The company came out with very strong reserves, above our expectations. Revenue was 6% above and EPS was 20% above. In fact, we just looked at year on year for fourth quarter alone and it was 30% revenue growth, 40% earnings growth. Very strong number.

However, we believe that some of that fourth quarter upside was because of dealers stocking up ahead of the anticipated price increase post the excise duty hike in the budget. We think that the momentum for volume in the next couple of quarters will be soft. There is a general concern about the demand growth, given the overall economic picture.

Instead of 16-17% volume growth in FY12, we are now looking at maybe 13% volume growth. We think that growth rates will come down and the stock is sort of priced for perfection, factoring in sustainability of historical growth rates for very long period of time. We feel that at this point, Asian Paints like quite a few consumer stocks, probably is ready for some sort of a fall at some point.