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Emerging Bluechips

It seems funds and FIIs are not indulging in any kind of speculation since their investments are spread over diverse sectors

Mid Caps have turned trendy, just like the youngsters. Guided and invested in by funds, these companies, some of them doubtful starters till a few months or years ago, have come into their own. So much so that some of these are now ready to take on the market adults, the large caps. As part of the Value Research trend-spotting, we bring you the stocks which are now everybody's babies.

First, we have shortlisted the stocks which have been there for quite some time, say for over one year. The list could have been more exhaustive but for the fact that we have dumped those companies which turned large caps.

For example we did not include Siemens, which was a mid-cap company till five years back (Rs 670 crore market cap). Even in December 2004, it remained a mid cap though its market cap (Rs 4,380 crore) went up significantly. Over the years it turned too big to be accommodated in our list. Siemens now figures in Nifty Fifty with a market cap of over Rs 19,000 crore.

Then we also did not highlight stocks in which there were less than 10 funds had invested. So passing through all this rigour, we finally zeroed in on to 12 mid cap stocks, which are high on funds and FII radar.

We start with Kalpataru Power, in which the funds and FIIs have gone high octane.

Kalpataru Power is a leading player in design, testing, fabrication, erection and construction of transmission lines and substation structures.

The government's ambitious Rs 1,70,000 crore planned investment by 2012 for rural electrification has thrown up opportunities for players like Kalpataru. A healthy order book of Rs 2,000 crore, high margins and the entry into the pipeline contracting business hold great prospects for the company. The export opportunities in the Middle East are expected to boost the order flow. With its entry into biomass power generation and pipeline infrastructure projects, the company is slowly diversifying, without diluting its core competence. This is one company where FII and mutual fund interest has been the largest. The FIIs increased their holding in the company by 154 per cent in the September quarter over June quarter. Similarly the funds also more than doubled their holding in the stock from a mere 3.65 per cent in June quarter to 8 per cent in September quarter.

India Cements is the other fancied stock. Key reasons for the new charm - the sector outlook, rising capacity and increased cost efficiency. With the cement sector on an upswing, most players are expanding capacities and India Cements is no exception. The company has been able to reduce its power and fuel costs by using more captive power and better conservation of energy.

This has pushed the stock to around Rs 240, a 130 per cent rise in a year. The growth for the company is coming from South India where the demand is growing at a healthy 10.5 per cent. However India Cements remains among the most sold stocks in October. While some funds exited the stock after its share price rose significantly, there are some funds that are still holding put.

This time from the ongoing rally, it looks like funds and FIIs are not indulging in speculation in the sense that their investments are spread over diverse sectors. They have not shown any clear preference for any particular sector. Their mid-cap picks are scattered all over.

If there are cement and construction companies in their picks, there are auto and engineering companies too, not to say of banking and petroleum stocks.

In the construction pack, though there has not been a significant rise in the holdings by the fund houses in Nagarjuna Constructions, an increasing number of them have been adding the stock to their portfolio. Though the company reported a 77 per cent jump in top line and 92 per cent jump in net profit in the second quarter of the current financial year, its margins squeezed due to change in the order book mix and higher sub contract cost as the company has now started giving some projects to sub contractors. However, a strong order book of around Rs 7,000 crore will continue to strengthen its numbers.

IPCL is another stock, which has generated keen interest of FIIs and funds. The Gujarat High Court's nod for amalgamation of six polyester manufacturing companies with IPCL (effective from September 27, 2006) will auger well for the company. It will help it climb the value chain and de-risk the business model. During the first half of the current financial year, the company ran its plants at full capacity. Over a period of time one would also find some amount of inorganic growth happening. In the September quarter, the funds held 5.3 per cent of the stock, which was 41 per cent more than what they held in the June quarter.

Andhra Bank is the only banking stock in our list of mid cap favourites. The bank's increasing focus on high-yielding loan segments, buoyancy in fee income and ability to mop up low-cost funds are some of the reasons why it has come into the notice of funds and the FIIs. The bank's second quarter results for the current financial year show that it did not try to stretch its balance sheet unduly by adopting a controlled credit growth strategy. This strategy paid off and the bank's net interest margins surged by 10 basis points to 3.8 per cent on a sequential basis. With treasury reserves depleting and with margins under pressure, fee-based income holds the key for it. Another notable point is that higher recoveries and higher provisioning has helped the bank contain its NPAs. It remains one of the most profitable banks in the country. No wonder that funds increased their holding in the stock by over 56 per cent in the September quarter compared to June quarter. If MFs are there can the FIIs be far behind? The latter's stake in the company was up 10 per cent- from 16.52 per cent to 18.20 per cent during the period.

Interestingly, in our list we have an old warhorse of the Indian industry, the BK Birla group-owned, Kesoram Industries. The company has interests in cement, automobile tyres, tubes and flaps, rayon (viscose filament yarn & transparent paper), heavy chemicals, caustic soda, hydrochloric acid, spun pipes and refractories. It has improved the performance of cement and tyre divisions, and particularly the former recorded consistent growth in the southern region. In the cement business, though the company lacks economies of scale, the robust demand in this space for the next two years will fuel growth. The tyre division is laying stress on the lucrative replacement market for heavy vehicles like trucks and buses. Though it faces stiff competition from Chinese manufacturers, the improving quality of roads will hold good for the company. It had been increasing the output of steel and radial tyres and has benefited from its collaboration with Pirelli in this segment.

The rayon division can also be expected to be do well following the imposition of anti-dumping duties on viscose filament yarn and reduction in excise duty. The stock has appreciated 67.66 per cent over the three-month period and 268 per cent over one year. As many as 26 fund schemes had interest in the stock (till October 31, 2006). Now this is no mean achievement considering the fact that in December last year, only nine fund schemes had added the stock to their portfolio.

While funds hold around 11 per cent of Maharashtra Seamless, FIIs hold 6.07 per cent share in the company. It is the largest maker of seamless steel pipes and tubes in the country. The company's pipes find use in oil & gas sector, hydrocarbon industry, boilers, heat exchangers, automotive, bearing and general engineering industries. The company is betting big on new discoveries by Reliance Industries in KG basin and Cairn Energy in Rajasthan. Sensing opportunity, the company has increased capacity by 1 lakh mt. The company's current order book stands at a robust Rs 460 crore. The FIIs and the funds found the company numbers convincing. Some of them believe that MSL has a potential to become large cap. And they have reasons to believe that. The stock of the company appreciated 103 per cent in a year.

Ashok Leyland Ltd (ALL) and Amtek Auto are the two companies from the auto pack in our list of the most-in -demand mid caps.

ALL is the second largest commercial vehicle manufacturer in the country. It has regained its market share significantly, lost due to labour unrest. ALL has gained market share through an improved product mix, a shift to the technologically superior Hino engines and a strong distribution network in the last one-and-a-half year. The company is also laying focus on non-cyclical businesses like passenger buses and spare parts, enter ing new export markets like the African and Gulf markets and strengthening its defence portfolio. The company is aiming to earn revenues of $100 million in three years by targeting markets like the USA, Europe, Malaysia and Austria. However the company needs to keep a keen eye on new entrants into the sector like MAN, Mahindra and Mahindra- International Trucks and Daimler Chrysler. Auto components company, Amtek Auto manufactures components for use in engine, transmission and suspension systems. The major categories of components include connecting rod assemblies, which is the largest in India, steering knuckles, suspension and steering arms, crankshaft assemblies for two-wheelers, torque links etc.

The company is the OEM supplier to biggies like Maruti Suzuki, John Deere, TVS Suzuki, JCB, JBML, Case New Holland, GE, Hero Honda, Hindustan Motors, Mahindra & Mahindra, Tata Motors, Eicher Tractors, Honda Scooters, Yamaha Motors and Bajaj Auto.

It recently formed a joint venture with Canadian company Magna Powertrain for 2-Piece flex plate assemblies. Flex plate assemblies are used in automobiles with automatic transmission systems. The joint venture is a step for the company to broaden its client base in the overseas markets.

Close on the heels of auto sector companies is Greaves Cotton. This company is in the portfolio of as many as 21 fund schemes. The company manufactures diesel/ petrol engines, gensets, agro equipment and construction equipment. The company continues to cash in on the increased infrastructure spend by the government and demand for alternative sources of power. The company's engines business will continue to propel its growth, which currently contributes majority of its revenues.

Perhaps in our list Jain Irrigation is the only company, which is a pure agriculture play.

Jain Irrigation Systems is a one-stop shop for agricultural equipments. The company manufactures micro-irrigation systems (strip tubing, emitters, jets and mini sprinklers), polyethylene and PVC pipes. It has more than 50 per cent market share in drip and sprinkler irrigation equipments segment in the Rs 200-crore domestic market. Projected investments in the agricultural sector during the X and XI plan have been pegged at Rs 6,200 crore. Since most of these projections are nearing their implementation phase, it would put the companies operating in the agriculture space in the high-growth trajectory. The company also has a 50 per cent market share in micro-irrigation segment (MIS). The task force on micro irrigation has recommended covering 67 million hectares under micro irrigation and since the cost for such systems is still prohibitive for a farmer, the government has decided to provide 50 per cent subsidy. Going by the government policy, this segment is expected to be the growth driver for the company in the years to come. Though Andhra Pradesh and Gujarat have implemented the scheme, other states will soon follow suit. The thrust on infrastructure sector will also give a boost to company's PE pipes business. The company has interests in food processing and onion dehydration.

Funds and FIIs also did well for themselves by adding Thermax to their portfolio. The stock price of the company has appreciated over 96 per cent in a year. In our list this is one stock which is held by the maximum number of mutual fund schemes- 49. Those who still have faith in the stock won't be disappointed going forward for the company has given 30 per cent plus growth guidance for the current fiscal year.

Thermax is among the most respected names in energy and environmental engineering and manufactures products for heating, cooling, waste heat recovery, captive power, water treatment and recycling, waste management etc. Its advanced products are extensively used in cement, fertilisers, petrochemicals, power, textiles, dairy, sugar, food, pharmaceutical industry. The company's order book stood at around Rs 3,000 crore (as on September 30, 2006) showing that engineering companies are benefiting immensely from orders from other sectors. It is also adding capacity at its Savli plant in Gujarat. Though a strong player in the sub-50mw captive power plant category, it has also started catering to higher range as well. The company recently received two orders worth Rs 383 crore for 75 mw captive power plants for two cement companies. Considering the fact that cogeneration power units have a lead time of around 18 months, the order book of the company shows that it will sustain double digit growth in the medium term. Stringent laws in industrial pollution is expected to provide boost to the company.