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5 stocks up for grabs

After rallying sharply in 2017, many mid-and small-cap stocks have taken a beating in 2018. But this fall has also thrown up some attractive opportunities. Here are 5 quality stocks you can now bet on for the long run

Suprajit Engineering: Overcoming obstacles

Parvatha Vardhini C

Why Buy

*Robust domestic demand

*Recovery in Europe business

*Gains from diversification into non-automotive space

The mid-cap carnage in 2018 has seen the Suprajit Engineering stock drop by about 25 per cent so far this calendar year. With the domestic auto industry growing strongly and the prospects for group company, Phoenix Lamps, looking up, the fall is a good entry point for long-term investors. The stock currently trades at a price-to-earnings multiple of 25 times its trailing 12-month consolidated earnings, as against 36 times in the beginning of 2018.

Gaining strength

Recovering from the demonetisation and GST moves, the auto industry closed fiscal 2018 with a healthy 14 per cent growth in sales volumes over the previous year. Demand continues to be strong this fiscal too, with the industry recording 18 per cent increase in volumes so far. This bodes well for Suprajit, which supplies mechanical control cables and instruments such as speedometers and tachometers to the auto industry.

Following a growth by acquisition strategy, the company in 2015 acquired Phoenix Lamps, a supplier of halogen lamps to the domestic and international markets. This was followed by the acquisition of the US-based Wescon Controls, a maker of cables for off-road and non-automotive segments. It now derives about 45 per cent of its revenue from the international markets. Export of lamp through Phoenix faced headwinds in the last one to two years, due to inability to supply the H7 variety of halogen lamps demanded by European auto manufacturers. Things have taken a turn for the better now, with the company beginning to make these lamps and regaining some of its lost customers.

Capacity utilisation for the H7 lamps has now improved to 40-50 per cent, from 25 per cent in the second half of last fiscal and will move up further.

With the shift to LEDs taking root, developing a strong after-market for its halogen lamps remains key for the company. Providing a diversification from the cyclical nature of the auto industry, prospects for Wescon also appear sanguine.

After recording a flat year-on-year growth in profits for the first nine months of last fiscal, Suprajit bounced back in the quarter ended March 2018, with profits growing by 40 per cent y-o-y to ₹56.3 crore. Net sales for the quarter moved up by about 13 per cent to ₹406.4 crore.


Gulf Oil Lubricants: Don’t let it slip

Anand Kalyanaraman

Why Buy

*Strong financial position

*Healthy volume growth likely

*Good pricing power

Since early February this year, the stock of lubricant maker, Gulf Oil Lubricants, India has fallen more than 22 per cent. This is despite a strong show by the company in the March 2018 quarter, with 31 per cent increase in revenue y-o-y and 32 per cent increase in profit, aided by about 26 per cent volume growth.

Overall, the fiscal 2017-18 was a good year for Gulf Oil Lubricants. It quickly put behind it the GST blues of the June 2017 quarter and posted full-year profit growth of 35 per cent y-o-y, aided by healthy volume growth, higher margins and a relatively low base. The stock slipping badly, despite this good performance, could be attributed to a couple of factors.

One, the ongoing market volatility that has taken a toll on many small- and mid-cap stocks, including some good-quality ones. Next, the sharp rise in crude oil price and the rupee’s slide over the past few months that will increase the cost of base oil — the company’s main raw material.

This fall in the Gulf Oil Lubricants stock though presents a good buying opportunity for investors. At ₹833, the stock trades at a price-to-earnings ratio of about 26 times, compared with its average valuation of about 30 times over the past three years and about 38 times in early December 2017. Strong earnings growth and the fall in stock price have moderated the stock’s valuation.

The business of Gulf Oil Lubricants should continue on the growth path. Sales growth in the auto sector, its main customer segment, remains robust; about 80 per cent of the company’s revenue comes from automotive lubricants. The company has been consistently growing faster than the overall lubricant industry and improving its market share in automotive lubricants. This should continue with expanding distribution network, branding initiatives, and tie-ups with dealers and original equipment manufacturers (OEMs). Besides, the new 50,000 mtpa plant in Ennore, Chennai should aid volume growth, especially in the markets of South and East India. The Silvassa plant has capacity of 90,000 mtpa.

Also, the company has good pricing power as seen in the past, and its product mix with premium products enables it to pass on cost increases. This should alleviate concerns on the impact on profits due to increase in base oil cost. Even if price has to be kept subdued and margins sacrificed to some extent, volume growth should aid the bottom-line. The company has a strong financial position, with a net debt-free balance sheet.


Sobha: On firm ground

Bavadharini KS

Why Buy

*Healthy launch pipeline

*Stable financials

*Land bank advantage

The stock of Bengaluru-based developer, Sobha Ltd, has fallen about 24 per cent since January, mainly due to headwinds in the realty sector. However, with the effects of RERA (Real Estate Regulatory Authority) and GST tapering down, and decline in unsold inventories, project launches are picking up. Sobha is well-poised to gain from the improving prospects within the sector, with launches lined up and multiple projects nearing completion.

In FY-18, Sobha registered revenue and profit growth of 24 per cent and 35 per cent y-o-y respectively. At the current price, the stock trades at 21 times its trailing 12-month earnings, slightly higher than the average it had traded in the past three years. Though the stock has taken a beating, the sales momentum is expected to be healthy in the coming quarters. Also, entry into the affordable segment is expected to help the company’s earnings, going ahead.

The company has recently received new contractual order for construction of the Azim Premji University for a total value of ₹563 crore. It also plans to launch six to eight projects in FY-19, across existing locations (of 8 million sq ft), of which three to four launches (of about 3 million sq ft) are in the advance stages of approval.

As some of these projects are in the affordable housing segment, the company’s earnings are expected to improve, with robust volumes in the space and quicker project completion. The company is also looking to expand into new territories. A step in this direction is the company’s entry into Gujarat’s residential market with GIFT city.

The company mainly operates in residential segments, with presence in luxury, super luxury and affordable housing properties. It also develops commercial properties and provides contractual services such as civil, electrical, interior and landscaping. The company has presence in cities, including Gujarat (GIFT city), Gurgaon, Chennai, Kochi, Thrissur, Coimbatore and Pune. For the June quarter, its sales volume has risen by about 18 per cent y-o-y; this is a continuation of the trend seen in the previous quarters of fiscal 2018. The average price realisation grew 4 per cent y-o-y to ₹7,941 per sq ft for the same period.

Sobha’s huge land bank of 2,472 acres spread across nine cities bodes well for the company.


V-Guard Industries: Powered by demand

Why Buy

*Government push for affordable housing

*Aggressive expansion into non-south markets

*Company looking to expand inorganically

The stock of V-Guard Industries has corrected 25 per cent since January.

It discounts the estimated earnings for 2018-19 by 39 times (down from 41 times in February). Its rival — Havells — trades at a PE multiple of 41 times. Increasing disposable income of the middle-class and the government’s push towards affordable housing, should keep demand for consumer electricals growing.

The recent correction in V-Guard provides a good entry point for investors with a long- term perspective.

For the full year 2017-18, the company reported a revenue growth of 15 per cent, year-on-year.

In the March quarter, it recorded 13 per cent growth in revenue (adjusted for GST) with strong volume growth in kitchen appliances, switchgears and digital UPS.

The non-South market showed a growth of 20 per cent y-o-y in 2017-18, contributing 37 per cent of revenues, up from 35 per cent in the previous year.

V-guard intends to bolster its brand and increase visibility in the non-South market; over the next five years, it expects to make over half its revenues from this region.

The company plans to add 3,000-5,000 retailers across the country each year over the next five years, with higher addition in the non-South region.

However, the company’s operating profit margin fell sharply to 6.3 per cent in the March quarter compared with 9.7 per cent in the same quarter the previous year, owing to high ad expenses, following the brand rejuvenation exercise.

The net profit for the period was down 30 per cent y-o-y.

Notwithstanding the near-term blip in earnings, the company’s prospects are on a sound footing.

The aggressive sales promotion, new products and expansion into new markets should help the company grow sales in double-digits over the next few years.

During the March quarter, the company launched modular switches in Kerala, air-coolers in Hyderabad and Delhi and a new variant of ‘smart’ ceiling fans. V-Guard targets a volume growth of 15 per cent annually over the next five years.


IRB Infrastructure Developers: On road to growth

K Venkatasubramanian

Why Buy

*Attractive valuation

*Strong order book

*Foray into HAM contracts

The shares of road construction companies have been on a tailspin over the past few months on fears of execution delays and funding concerns. In some cases, the market may have overdone the correction, especially for players with strong delivery track records and revenue visibility.

IRB Infrastructure Developers (IRB) is one such player where execution and prospects remain healthy and yet the stock got sold off heavily along with other players.

The stock is down 20 per cent so far this calendar year.

A healthy order book, contract wins under the new HAM (hybrid annuity model) and reasonable traction in its toll projects are positives for the company.

At ₹190, the stock trades at seven times its likely per share earnings for FY-20, making it an attractive bet for investors with a two-year horizon. The three-year average price-earnings multiple for the stock has been about 11 times.

In FY-18, IRB’s revenues fell 2.6 per cent over the 2016-17 to ₹5,694 crore, while net profits rose by 28.2 per cent to ₹920 crore. Revenues fell as the company transferred many BOT (build operate transfer) assets to the IRB InvIT Fund during the fiscal. Profits rose as interest costs came down substantially.

IRB has been into EPC (engineering, procurement, construction) and BOT projects.

With the National Highways Authority of India (NHAI) increasingly handing out contracts under the new HAM (hybrid annuity model), the company is increasing focus on bidding for such projects. In HAM contracts, the NHAI bears 40 per cent of the project cost, while the developer has to raise the remaining 60 per cent.

IRB has already won three HAM projects worth about ₹5,500 crore.

The company has indicated that bids have been won with 10-11 per cent PAT margin on the EPC side and about 10-11 per cent IRR on gross equity.

As of March this year, the company has a total order book of over ₹15,000 crore, which is about 2.7 times its FY-18 revenues.

Collections from large existing contracts are fairly healthy. Toll collection in the Mumbai-Pune project is up nearly 24 per cent in FY-18 compared to the previous fiscal. In the Ahmedabad-Vadodara segment, collections rose 7.9 per cent in 2017-18.

Published on July 21, 2018

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