Prabhudas Lilladher bets on 8 midcaps for long term

Prabhudas Lilladher has come out with its report on top picks in mid cap.

YES Bank: Yes Bank generates ~22-23% ROEs which is among the highest in the industry and valuations on a PE basis is extremely reasonable for a bank with negligible thermal power exposure. An impending dilution will be ~15% book accretive leading to favorable valuations of 1.88 on FY14 book without denting ROEs <18-19%. Mahindra & Mahindra Financial Services: MMFS has been reporting better-than-expected growth of ~35% YoY driven by all segments excl. tractors as Mahindra continues to add new OEMs and aid in their rural sales financing.  MMFS's margins have been inching down as funding costs increased over last 4-6 quarters as MMFS did not pass on the entire cost hike to consumers. With wholesale rates easing and a completely fixed rate book, we believe margins for MMFS will bounce back over the next 3-4 quarters. Sensitivity to Rs8bn dilution indicates a post dilution ROE of ~20% which remains best in class and valuations on diluted book at 1.9x FY14 book is undemanding in our view. Jammu & Kashmir Bank: J&K Bank enjoys a very strong liability franchise due to its state advantage, with CASA within J&K at ~55%. Despite just ~15% CASA outside J&K, J&K Bank’s total CASA at ~38.2% is among the best in the industry, providing the bank with a significant cost advantage. Low fees income and CA ratio are the only commonalities with PSU banks, apart from which J&K Bank is more of a private bank on most fundamental parameters like high CASA and margins, sound underwriting and high ROAs/RORWAs. Management continuity, which is a big issue with PSUs, is also absent in J&K Bank with ~5-6 years of average tenure for the Chairman; thus, valuation benchmarking to mid-cap PSU banks is unwarranted. The bank is trading at 1.3x FY13 P/B with ROE at plus 20%. IPCA Lab: We expect strong earnings CAGR of 34% over FY12-14 led by robust topline growth of 17% over the same period. Despite Rs5b capex planned over next 2 years, the company is likely to sustain healthy return rations and low gearing. Expect RoCE to remain above 25% for next 2 years with free cash-flow generation of Rs3.5b. The stock is trading at 15.1xFY13E & 11.7xFY14E earnings which is at significant discount to large cap and some of the mid-cap companies in the sector. Torrent Pharmaceutical: We expect strong EPS CAGR of 24% over FY12-14 led by 25% CAGR in international business. The company has strong balance sheet with lean working capital and zero net debt. Expect RoCE to remain above 25% over next 2 years and free cash-flow generation of Rs5.8b during the same period. The stock is trading at 14.0xFY13E and 11.3xFY14E earnings which is at significant discount to large cap and some of the mid-cap companies in the sector. Amara Raja Batteries: With the sixth consecutive quarter of outperformance of Amara Raja over Exide, we believe the valuation discount between the two could narrow. We expect the historical valuation discount of AMRJ (~30%) to Exide to narrow, given the consistent performance by the company. Our Target Price of Rs294 is based on 14.0x FY14E EPS (~13% discount to 16.0x FY14E earnings’ target multiple for Exide). Persistent Systems: Persistent witnessed ramp-down from top clients due to end of projects and M&A activity (of clients). Top clients, whose projects got shelved after acquisition, are already captured in quarterly run-rate. Moreover, due to project completion with other top-client, we may see no spill-over in Q3FY13. Nevertheless, the company is working with the same client on other projects to back-fill the gap. Hence, we expect it to recoup some of the negative impact.  We believe the option value of IP sales along with success of “Sell with Partner” could spin a positive surprise. Currently, Persistent is traded at 8.7x FY14E earnings estimate with 20% earnings CAGR (FY12-14E). NIIT Technologies: NIIT Tech is a unique IT services provider for TTL and Insurance sector (non-life) with a 28-year heritage. NIIT Tech is best positioned in the niche IT space to meet or exceed our above consensus forward estimates and grows faster than peers. With a P/E multiple of 6.5x, is at steep discount compared to the peer group, moreover with a predicted EPS growth CAGR of 16%, the valuation looks compelling. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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