5 Midcap stock to buy

Like in life, stock market clouds too, usually, have a silver lining. TheBSE Sensex rose to its all-time high of 12,671 points on May 11, 2006, andthen fell drastically to 8,800 levels in a matter of few weeks. Today, the Sensex is hovering around the 12,000 levels. Though the over 8per cent fall in the Sensex is bad news, the silver lining is thatindividual stocks, especially in the mid-cap segment, have fallen even lowerand are now highly attractive. While short-term worries like high crude oil prices, rising interest ratesand geopolitical tensions have subdued the market sentiment a bit, they havealso thrown up many investment opportunities. Investors can now comfortablychoose and buy shares of good companies at reasonably lower valuations.What's more, they can also expect good returns from such investments. However, it is still uncertain which direction the markets will take in themedium term. In this scenario, it is important to channel all investments,especially those in mid-caps and small-caps, only to good quality companies.If the business fundamentals of the company are good, it is well managed andits financials are healthy, your investment would not only survive weakmarkets but also give you sound returns. The criteria In this backdrop, we crunched some numbers to arrive at a list of investmentworthy mid-cap companies. In our analysis, companies with a profit (annualand June quarter) growth of at least 15 per cent cleared the first test. Wealso looked at the drop in their share prices. Companies whose share prices had fallen by at least 15 per cent, almosttwice the fall in the Sensex as compared to its May 11 peak, and whosevaluations looked attractive were considered. This, to some extent, helps inkeeping a tab on the price one pays for a stock -- basically to ensure thatone does not end up paying a huge premium for growth. To restrict the list to quality companies, we gave higher weight to factorslike the company's business segment, its standing in the industry, itsmanagement, entry barriers, and scalable business model. Quantitatively, key financial parameters like debt-equity ratio (weconsidered companies for which this figure was less then one), return oncapital employed (greater than 15 per cent) and positive cash-flow fromoperating activities were analysed. (In Dishman's case, the actualdebt-equity ratio is higher than one since it raised FCCB of $50 millionlast year for expansion and acquisition. A good part of that -- Rs 124 crore-- was kept in cash till March 2006, which when adjusted for, gives a netdebt-equity ratio of less than one.) Finally, only companies with good growth prospects were considered. Givenbelow are five companies from the mid-cap category which we believe have theability to grow at a fast clip and the potential to deliver healthy returns.1. Blue Star It is India's largest central air-conditioning and commercial refrigerationcompany, well-known for delivering quality products, and has asix-decade-long history. The company has a network of 23 offices, four modern manufacturingfacilities and around 1,800 employees. Blue Star supplies large centralair-conditioning plants, packaged air-conditioning systems, split and windowair-conditioners, cold storages and water coolers for commercial andresidential use. The boom in sectors like IT and IT enabled services, healthcare,entertainment, retail, hospitality, telecom, power and banking has created astrong demand for Blue Star products in the commercial air-conditioningspace. The prospects are good too, as this segment is expected to grow atover 20 per cent, at least over the next few years. Rising demand from relatively smaller segments like coffee and ice-creamparlours and restaurants has also boosted demand for light commercialair-conditioning products. No wonder, the company has clocked a compoundedannual growth in sales and profit of about 23 per cent each in the last fouryears. Leveraging on its product design knowledge and manufacturingexpertise, Blue Star has also started providing its services to customers inNorth America, the Middle East and Japan. The boom in the retail sector (malls, for example), rapid expansion in thetelecom and power sectors, upcoming airport projects, increasingindustrialisation, strong growth in IT and BPO segments and growth potentialdue to thrust on food processing (formation of agro-export zones andfood-parks) are some of the factors that should keep Blue Star's growth rateat over 20 per cent for the next 3-5 years. 2. Clariant Chemicals Clariant Chemicals (India), earlier Colour-Chem, now represents the mergedoperations of the five companies of Switzerland-based Clariant in India. Aspecialty chemicals company, Clariant Chemicals enjoys dominant positions inpigments (used by manufacturers of paints, printing inks, plastic, rubber,detergents and cosmetics, among others), dyes and speciality chemicals (usedto manufacture textiles, leather, pape and, personal care products) anddiketene-based intermediates. Dyes and speciality chemicals account for 57 per cent of revenues, the othertwo categories 41 per cent and the balance comes from master-batches. Thecompany's strategy of working closely with its customers and its ability toinnovate and deliver new products that meet their requirements has helped itachieve a dominant position. While topline growth rates in the past (CAGR of 6.2 per cent in the threeyears up to 2004-05) have not been very exciting, profits have grown at ahealthy 19 per cent. The future is promising too, as, with the global chemical industry focusedon consolidation and cost reduction, the prospects for the specialitychemicals industry look bright. On the other hand, India is also evolvingfrom being a manufacturer of basic chemicals to a producer of cost-efficientinnovative products, which in turn is helping it emerge as the sourcing hubfor speciality chemicals for certain industries. A McKinsey report has estimated exports to grow six-fold from $2 billion in2002-03 to $12 billion by 2015. Domestically too, big expansion plans oflarge players in segments such as textile, paper brighten up growthprospects. Together, these opportunities augur well for Clariant Chemicals, which has astrong parentage and already derives 25 per cent of its revenues fromexports. At Rs 220, Clariant is a good bet. 3. Dishman Pharmaceuticals This Ahmedabad-based company manufactures intermediates, APIs (activepharmaceutical ingredient -- the ingredient with the curative property) andquaternary compounds (Quats, catalyst compounds). Since 1998, Dishman has diversified its interests to the contract researchand manufacturing (CRAM) sector. Within a span of five years, Dishman hasachieved several CRAM projects and is a contract manufacture outsourcingorganisation. As a business strategy, Dishman typically establishesrelationships with MNCs through sales of low-margin Quats and later tries tomove up the value chain by entering into high-margin CRAM for intermediatesand APIs. Europe-based Solvay, its key CRAM client, came into its fold through thisstrategy. To boost its CRAM revenues further, Dishman is now acquiring specialised R&Dboutiques with MNC clients. After two acquisitions last year, Dishmanrecently acquired Carbogen Amics AG, a research-based company with sales ofabout Rs 310 crore and three facilities in Switzerland for making productsof high potency and value, from Solutia Europe, for $75 million (inclusiveof around $9 million for working capital). Apart from expansion at existing units, Dishman is also setting up a Rs45-crore unit in China, which will start manufacturing Quats andintermediates next year. This unit will help Dishman lower costs as basiccommodity chemicals are nearly 20 per cent cheaper in China. Power costs arealso lower by as much as 50 per cent. Lastly, Dishman has entered into a joint venture with a Saudi company tomanufacture API (production to start in 2007-08), where it will be thesupplier of intermediates. To sum up, Dishman has aggressive growth plans.Estimates suggest that the company should clock standalone revenues of Rs300 crore for 2006-07 and Rs 400 crore for 2007-08. Looks good. 4. Kirloskar Oil Engines (KOE) Even after 60 years KOE is going strong and figures among the largestmanufacturers of engines in the country with a broad product portfolio --engine capacity ranges from 3 horsepower (HP) to 1,100 HP. The company's engine business can be categorised into three separatestrategic business units that service different market segments. While thesmaller engine segment (3 HP up to 30 HP) caters primarily to theagricultural segment, the medium engine segment (30 HP up to 600 HP)addresses the industrial, tractor and power generation industries. The company, which has a technical collaboration with Pielstick of France,also manufactures larger engines with capacities exceeding 1600 HP. Theseengines find use in marine applications and power generation. KOE has been experiencing strong demand from nearly all the user segments,which is one reason for its robust performance -- net sales at Rs 1,470crore for 2005-06 represent a CAGR of 17.8 per cent during the last threeyears, while net profit (adjusted for non-recurring items) stands at Rs 93.2crore and has grown by 63.2 per cent over the same period. Demand from a majority of users of KOE's products is expected to remainstrong. KOE also has an auto component business, which manufactures enginebearings and valves. Here too, demand is expected to remain buoyant giventhe huge investments planned by auto majors. To prop up growth rates beyond industry numbers, the company has increasedits thrust on exports (up 42 per cent to Rs 128 crore in 2005-06). KOE'searnings growth should average 25 per cent (given the high base) over thenext two years. At Rs 216, the share discounts at 12.8 times its 2006-07earnings after excluding investments worth Rs 500 crore (or value of Rs 50per share) in KOE's books. Buy. 5. Taj GVK It is no secret that the Indian hospitality sector has been booming over thelast two years, occupancy levels have been rising and room rates have beenmoving up year after year. For Taj GVK, which operates three hotels in therapidly growing Hyderabad, the boom has been even better. Revenues have grown at a scorching pace from Rs 70 crore in 2002-03 to Rs188.7 crore (in 2005-06), while net profit has jumped from a measly Rs 9.2crore to Rs 46.2 crore during the same period. In order to tap the growing demand and to diversify into other cities, thecompany has drawn up aggressive expansion plans. Taj GVK is setting up a Rs125-crore hotel in Chennai (it will begin operations around March 2007) anda hotel each in Hyderabad (expected to be operational in 2008) andBangalore. It is also planning to expand two of its existing hotels in Hyderabad. Thiswill keep the growth rates ticking at a fast pace. Given that not many newprojects are due to go on stream in the near future (two years), even asdemand continues to grow, occupancy rates and room rentals should remainstrong for hotel companies. For Taj GVK, which is aiming to expand in highgrowth cities in south India, it should only become better. Source: Rediff