Midcap stocks have the best chance of becoming multibaggers. If an investor carefully prepares a portfolio of madcap stocks by looking at all aspects of fundamental analysis, the portfolio will deliver superior returns over an extended time frame.
Investors must buy midcap stocks which have superior businesses and consistent future cash flows. The business must run competently and have the potential for exponential stock price growth.
Multibagger stocks have also to be tracked for short-term price distortions. Such distractions create long-term value if there are sound economic fundamentals of the company.
The best stocks to buy are those midcaps that have adequate margin of safety. The stocks performance has to be assessed on an ongoing basis and various factors such as changes in the fundamentals of the stocks, industry position, market performance and broad macro-economic factors have to be considered.
List of best midcap multibagger stocks to buy now by Karvy
Apar Industries Ltd
Capacity Expansion & Premium Products to Propel Growth
Capacity expansion to derive growth: The company is currently expanding its conductors and specialty oils capacity by adding plants at Jharsaguda (Odisha) and Sharjah (UAE) respectively. The company is currently at 100% capacity utilization in both the segments. Apar is setting up a plant for conductor manufacturing with a capacity of 30000MT per annum on a capex of Rs. 360mn which makes the company a largest manufacturer of conductors in the industry with 180000MT per annum. As per management, the sites will be operational from Oct 2016. We expect the company to run on 70% capacity utilization in the new sites.
Focus on premium products to propel growth: The company is majorly focusing on premium products like HVDC in conductors segment, Auto lubes in specialty oil segment and elastomeric cables in cables segment. These all products are premium products and high margin earning products. The shift towards higher KV transmission lines and thrust on intra-state system will lead to increased demand of 765KV conductors. Apar’s value added specialty cables introduced on FY13 has aided to increase in EBIT margins from 1.4% in FY13 to 6.4% in FY16. We expect the momentum to continue and with the uptick in power cables can drive the 17.0% CAGR growth over FY15-18E.
Focus on transmission sector: Looking at Apar’s exposure to power and transmission space, we expect the government’s thrust on improvement of transmission sector will augur well for Apar industries. Government’s initiatives like UDAY and Deen Dayal Yojana to improve the financial health of the state discoms which would enable them to bring out new orders and incur capex in the sector. The company is having market share of 23% in conductors business and 45% in transformer oil business which give a picture of strong stability in the market.
Valuation and Outlook
We expect the revival of investment in transmission sector on the back of successful rollout of government policies like UDAY scheme, Deen Dayal Yojana etc. We expect stable commodity prices to drive 7.0%/7.5% CAGR growth in sales/ EBITDA respectively during FY15-18E. At Rs. 565, AIL is currently trading at 15.8x of FY18E EPS. We recommend Apar with a “BUY” rating for a target price of Rs. 646 representing 15% upside potential.
Rakesh Jhunjhunwala Latest Portfolio
Atul Auto Ltd
Lower Raw Material Cost Leading to Higher Gross Margins
Considering good prospects of monsoon and the festive season in Q2FY17E and Q3FY17E, we expect the company to register volume growth of 7.0% in FY17E to sell 46,966 vehicles and around 10.0% volume growth in FY18E to sell 51,662 vehicles. Accordingly, we expect the company to register operating revenue CAGR of around 10.0% during FY16-FY18E to reach Rs. 5,688 mn in FY17E and Rs. 6,426 mn in FY18E.
Atul Auto Ltd has reported decrease in its operating revenues to Rs. 930 mn in Q1FY17 Vs Rs. 1,068 mn in Q1FY16 and Rs. 1,297 mn in Q4FY16. Decrease in the company’s volumes was majorly on account of VAT issue in the state of Gujarat till May 19, 2016 and some registration issues in the state of Punjab. Exports volumes for the quarter stood at 336 vehicles as against 567 vehicles in the same quarter of last year. This was mainly due to the unfavourable conditions in terms of product approvals and currency deterioration in its export countries.
Higher Gross Margins and Lower EBITDA: The company’s gross margin for the quarter was at 27.5%, the highest compared to the same corresponding quarter in its last 5 years. EBITDA for the quarter decreased to Rs. 87 mn Vs Rs.119 mn in Q1FY16 and Rs. 173 mn in Q4’FY16 and EBITDA margins stood at 9.4% which was lower from 11.1% in Q1’FY16 and 13.4% in Q4’FY16. The company’s focus in improving the operational efficiencies along with likely increase in capacity utilization level, we expect the company’s gross margins to increase to 28.1% in FY17E and around 28.2% in FY18E from 27.5% levels in FY16; and EBITDA to register CAGR of 8.9% to reach Rs. 790 mn in FY17E and Rs. 904 mn in FY18E, whereas EBITDA margins to remain at 13.9% in FY17E and 14.1% in FY18E.
The company’s optimism in maintaining the growth rate for the year despite dismal performance in Q1FY17, considering the company’s performance in the last 5 years, we expect the company to gain further market share in 3-wheeler segment. We reiterate our “BUY” recommendation, however lowering from our previous target price by valuing it at 20.7x of its FY18E EPS of Rs. 25.8, which is forward mean P/E over its last 5 years for a target price of Rs. 533.
Bajaj Corp Ltd
In Pursuit of Excellence, with Almond Drops Hair Oil
Leading position in Light Hair Oil market and Well established brands to surge revenue growth: Bajaj corp is one of the leading players in FMCG sector in hair care category. Bajaj Almond Drops hair oil is market leader in the light hair oil segment with more than 60% of market share and major revenue contributor for the company. Despite the adverse market condition in the hair oil industry, Bajaj corp managed to register 2.9% growth in the sales volume and 4.1% increase in realisation per case for Almond Drops Hair Oil (ADHO) brand. However, the consumption demand is expected to improve considerably on the back of expected good monsoons in FY17E, after two consecutive years of poor rains. Good monsoons are likely to improve disposable incomes of rural India and hence consumption demand would be boosted. This would help the company to post moderate growth in coming years.
Increasing outlets to tap rural markets to push growth: Bajaj corp is continuously focusing towards improving its presence and strengthening its portfolio to drive higher revenue growth. At present, 42.0% of Bajaj Almond Drops hair oil sales are from rural areas only and the company managed to capture 63.2% market share in rural areas. Bajaj corp managed to come up with 0.89mn outlets during FY16, out of which 0.43mn were opened in urban area and 0.46mn in rural area.
Valuation and Outlook
Bajaj corp is market leader in Light Hair oil segment and more than 91% of its revenues are coming from ADHO only. Bajaj corp, with its credentials of debt free, healthy ratios and healthy cash flows, is currently trading at 20.9x FY18E EPS. We value the company at 24.0x FY18E EPS and recommend the company with “BUY” rating, for a target price of Rs. 465, representing an upside of 15% for a period of 9-12 months.
Esab India Ltd
Domestic Economic Revival Together with Healthy Balance Sheet to Aid Profitability
Improved domestic industrial activity complemented by adequate capacity headroom: Growth in investment activities and increased investments in key sectors like steel, construction, infrastructure, power and cement are giving an optimistic outlook for future. We believe the Gross Fixed Capital Formation (GFCF) to GDP to improve to 33% by FY17E, also ESAB’s current blended capacity utilization levels of ~60% leaves enough headroom to sustain the anticipated increase in demand. We expect the revenue to grow at 5.9% CAGR for FY16-18E.
Profitability and return ratios to improve by FY18E: EBITDA & PAT margins are expected to reach 12.4% & 8.3% respectively by FY18E, mainly owing to incremental revenue from new product launches, increased revenue from higher margin services segment. Also we believe RoE & RoCE to expand by 180 & 130 bps over FY16 to reach 10.8% & 15.4% by FY18E respectively.
Strong financial position to sustain growth: Net debt to Equity at -0.2x, Net working capital to sales at less than 50% and cash per share of Rs.32.9 indicate ESAB’s balance sheet strength to remain debt free while maintaining operational efficiency in the revenue model that could be sustained going forward through FY16-18E. Also, ESAB’s ability to produce consistent positive cash flows through harsh times together with healthy asset turnover ratio, huge cash & investments balance (~Rs. 1705 mn) enable it to price competitively to gain market share going forward.
Valuation and Outlook
We value the company based on P/E basis. At CMP of Rs. 573, ESAB is trading at 21.0x of FY18E EPS. Historically, ESAB has been trading at 1 standard deviation of one year average forward P/E multiple of 24.5x. Furthermore, ESAB has been trading at an average P/B of 3.2x for the last five years. We ascribe a multiple of 24.5x to FY18E EPS. We recommend the company a “BUY” rating for a target price of Rs. 670 representing an upside potential of 17% for 9-12 months period.
Fineotex Chemical Ltd
Long Term Strategic Growth Drivers in Place…
Increased focus on specialty chemical to boost operating margin: Fineotex Chemical Limited (FCl) has posted consolidated revenue growth at CAGR of 8.0% over the period of FY12-16. EBITDA recorded significant growth at CAGR of 37.3% during same period whereas EBITDA margin has also grown by 819bps YoY to 24.7% in FY16 due to overall decline in raw material cost by 618 bps YoY. PAT Margin has grown by 301 bps YoY in FY16. We believe that the company will continue with growth momentum and it might record EBITDA and PAT growth of 24.6%-24.8% and 7.3%-9.5% respectively, during FY17E-18E on the back of robust demand by end user industries for higher yield specialty chemical production, onsite/offsite R&D facilities for product customization and niche clientele portfolio.
Capex to drive growth: FCL has planned for Rs. 80-100 mn capex for expanding manufacturing activities on recently acquired land in Wada (Maharashtra), Khopoli (Maharashtra) and Ambernath (Maharashtra) funded through 100% internal accruals. We believe that this capacity expansion will help to add topline growth by CAGR of 662 bps during FY16-18E.
Healthy Balance sheet with Zero debt: FCl is cash rich company with cash & equivalent of around Rs. 350-400 Mn (including investment in securities) & enjoying zero debt which will support to execute growth plans without affecting the financial performance of the company.
Valuation and Outlook
FCL majorly focuses on high margin specialty chemical business and capacity expansion plan with healthy financials coupled with zero debt and is currently trading at CMP of Rs.27, representing PE 15.0x FY18E EPS. We value the company at average P/E of 18.2x FY18E EPS. We recommend the company with “BUY” rating on the stock with the target price of Rs. 33, representing an upside potential of 23%, for a time frame of 9-12 months.
Gabriel India Ltd
Improved Processes Leading to Excellent Margins Despite Stable Revenue Growth
Gabriel India Ltd’s operating revenue has registered a steady growth in its operating revenue (YoY) of 8.3% to Rs 3,704 mn, whereas it has seen an increase of 1.1% (QoQ). The company has witnessed an increase in volumes in passenger vehicle segment compared to the same quarter of its last year (32.0% Vs 27.0%) led by the likes of its some customer products, whereas the share of its 2/3 wheeler segment (56.0% Vs 60.0%) has decreased because of the lower off-take from 2 of its customers and share of commercial vehicles segment stood at 12.0% Vs 13.0% of its revenue. We introduce FY18E earnings and expect the company to register stable operating revenue at CAGR of over 10.4% during FY16-FY18E on the back of expected improvement in the economy and expected reforms at the macro-economic level leading to the increased customer demand.
Improved processes leading to increase in margin profile: The company’s gross margins for the quarter was at 28.6%, the highest compared to the quarterly trend of the same corresponding quarter in its last 5 years, whereas EBITDA margins stood at 9.2% which was again the highest in its last 5 years. We expect the company to register EBITDA CAGR of around 17.6% during FY16-FY18E and increase its margins to 9.7% in FY17E and 10.1% in FY18E resulting on account of the company’s focus on cost control measures, improvement in processes driven by technological developments and increased capacity utilization levels.
Valuation and Outlook
The company’s likely focus on increasing its product lines coupled with the fact of improvement in the domestic market demand is likely to register higher growth in its revenues. Its focus on improved processes driven by different product mix and measures in improving and sustaining the margin levels is expected to witness increase in its margins and earnings profile in the coming years. We introduce FY18E earnings and reiterate our “BUY” on Gabriel India valuing it at 20.0x of its FY18E EPS of Rs 7.1, which is ~1 Standard deviation from its mean forward P/E multiple over its 5 years and also was the average forward P/E multiple in the last 2 years to arrive at a target price of Rs. 144.
Dolly Khanna buys and invests in such stocks which have good fundamental qualities. Such stocks can become multibaggers because of their strong fundamental performance.
Indag Rubber Ltd
Set to Ride on Commercial Vehicle Growth with Strong Cash Flows and Balance Sheet
Recovery in Commercial vehicle growth: Demand from commercial vehicles is one of the major growth triggers for retreading industry. Retreading industry picks up with lag effect. With improving economic activity, good growth is witnessed in commercial vehicle segment which is expected to sustain in the coming quarters and in the coming years. Domestic CV sales grown by 15.0% in FY15 and by 11.2% in FY16. The company is focusing more on end retreader and fleet owners.
New capacities coming on stream: Over the years, the company added the capacities with better utilization levels. Currently, it is adding 6200 MTPA (Metric Tonne Per Annum) (brownfield expansion), addition of around 50% to the current capacity of 13800 MTPA, with capex of Rs. 70 Mn which is expected to complete by mid-2016. This capacity augments well for the company’s growth in the long term.
Increase in Radialisation in CV segment: Current radialisation in India is expected to be in the range of 28%-30% and expected to increase to 45-50% in the next three years. Radialization will get more tyres for retreading, as casing gets less affected and can be retreaded multiple times. This is going to narrow the gap in retreading time.
Healthy balance sheet: With zero debt, IDR has strong balance sheet with surplus free cash and investments over the years accumulated to Rs. 870 Mn, majority deposited in mutual funds. Lower capex over the years, high return on Assets and efficient working capital management led to better operating and free cash flow.
Valuation and Outlook
IDR is the leading thread manufacturing company in the domestic market with strong distribution network (25 depots). Though the growth is expected to be weak because of excise duty effect, but because of growth in free cash flow on the back of lower capex, better working capital cycle and expected recovery in returns on equity and assets by FY18E, we recommend Indag Rubber and assign P/B multiple of 2.9x to FY18E Book value and give “BUY” rating with a target price of Rs.220, with an upside potential of 18%.
Mayur Uniquoters Ltd
Unique Product & Capacity Scaling-up to Ensure New Heights
Auto OEM Exports and Footwear to boost Sales in FY18E: Auto OEM Exports and Footwear contributed to a whopping 46.0% and 19.0% in FY16 and we see the trend to continue in a similar pattern in FY17E and FY18E. Auto OEMs in US and other parts of the world show a huge demand supply gap and hence a tremendous volume growth potential for Mayur in the upholstery market and is supposed to add a substantially to the top-line of the company.
Poly Urethane (PU) Plant to expand capacity in FY18E to meet rising demand from Exports: About Rs.1000 Mn of capex is going to be used by the company for PU leather plant in pipeline subject to Government clearance. Rs.800 Mn finance has been acquired from the 8.5% stake sale to WestBridge Capital deal in FY15 and is supposed to add 0.3 Mn metres to the existing capacity of 3.05 Mn linear metres and will be majorly used to meet the volume growth potential of the exports in general which contribute ~27% to revenues.
Synthetic Leather is increasingly replacing genuine leather: India is next only to China in terms of artificial/ synthetic leather production. Synthetic leather accounts for 80% of the total leather product manufacturing in the country. Synthetic leather industry in India is estimated to be ~Rs.45-50Bn. The market size of India’s synthetic leather industry is expected to double in the next 5 years. It is increasingly replacing genuine leather because of high durability, variety and for the ease of maintenance.
Valuation and Outlook
MAYUR’s strong position in the organized segment with diverse product portfolio, established clients and with the establishment of PU plant adding substantially to the existing capacity to cater solely for exports will make it a clear market leader. We recommend “BUY” for a target price of Rs.489 representing an upside potential of 15% in 9-12 months time frame. At CMP of Rs. 427, the stock is trading at PE of 24.2x of FY18E EPS.
Porinju Veliyath Latest Portfolio
The Byke Hospitality Ltd
Unique Asset Light Business Model Continues to Scale New Heights
Room inventory addition to drive hotel revenues by 21.2% CAGR during FY16-18E: In order to scale its room inventory and increase its geographical presence, Byke is planning to add 8 new leased properties by FY19E. We expect the 4 properties to be operational by mid-FY18E leading to an addition of ~420 leased rooms, ~10 restaurants & ~12 conference halls and the total hotel revenues to grow at 21.2% during FY16-18E reaching to Rs. 1677 Mn in FY18E with Rs.914 Mn contributed from room rental revenue and Rs. 763 Mn from F&B and other segment.
Chartering business revenues to grow @ CAGR of 26.4% during FY16-18E: The numbers of the chartering rooms sold are expected to grow at 22.8% CAGR and reach 7.4 lac room nights in FY18E. We expect the ARR (Average Room Rent) to grow at 3.0% with occupancy levels in the range of 94-95% and revenues to grow at 26.4% to reach Rs. 1871 Mn by FY18E.
Rich Cash Flows and asset-light structure turning out to be a self funding hybrid model: We expect the business model to continue to support Cash Flow from Operations (CFO) and to grow at 24.7% CAGR during FY16-18E. The increasing CFO is further enabling “Byke” to invest in the leased properties and chartering segment leaving aside healthy free cash flows to the equity owners. We expect the free cash flow yield to remain in the range of 1.3-2.7% during FY16-18E.
Valuation and Outlook
The upcoming addition of leased room inventory and restaurants along with increasing room nights sold in chartering segment will aid the company to grow its revenue with improving operating margins and blended return ratios in the years to come. We recommend “The Byke” assigning P/E multiple of 19.7x to FY18E EPS and give a “BUY” rating with a target price of Rs. 207 with an upside potential of 28% for a period 12-15 months.
Tube Investments of India Ltd
Tube Investments contains more of positives; maintain BUY
Tube Investments of India (Tube) revenue, EBITDA and PAT grow to Rs.10,979 Mn, Rs.573 Mn and Rs.424 Mn respectively during Q1FY17 which are higher by 6.4%, 37.6% and 135.4% respectively on YoY basis.
We revise our standalone revenue, EBITDA and PAT to Rs.42,077 Mn, Rs.3,780Mn and Rs.1,542 Mn respectively for FY17E; and for FY18E, the same is revised to Rs.46,652 Mn, Rs.4,404, and Rs.1,921 Mn respectively.
We expect cycles segment to grow to Rs.15,540 Mn and Rs.16,370 Mn for FY17E and FY18E respectively which is a 5% CAGR growth during FY16-18E. The estimate incorporates 2.3% of volumes sustained by institutional business and 2.6% of realisation growth largely from speciality cycles.
Overall engineering volumes to grow at a CAGR of 7.2% while the blended realisation are estimated to grow at a CAGR of 5.6% delivering segment sales of Rs.18,200 Mn and Rs.20,890 Mn respectively by FY17E and FY18E respectively. We expect the auto sector to continue do well enabling engineering segment to post strong performance.
Auto products business, doorframes, chains and fine blanked components are expected to deliver strong growth on the back of auto sector while there is sufficient evidence in the market for railway sections and coaches revival. We expect the auto products and railway products to grow at a CAGR of 10.2% and 7.2% respectively during FY16-18E. The overall metal products segment is estimated to reach to Rs.10,280 Mn and Rs.11,390 Mn respectively which is a CAGR of 9.3% during FY16-18E.
Valuation and Outlook
We maintain ‘BUY’ on Tube Investments of India for a target price of Rs.654 on SoTP basis with standalone business valued at Rs.237 based on 23x (11 year average P/E) of FY18E EPS of Rs.10.3, Chola investments valued at Rs.256/share, Chola MS valued at Rs.141/share and all other investments valued at investment value of Rs.20/share aggregating to per share value of Rs.654 representing an upside potential of 15% for 9-12 months period.