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Sunday, September 12, 2010

Angel Broking Small Cap Recommendations

Angel Broking has recommended following top picks for the month of September from universe of small caps. The investment rationale and target price for each stock has been mentioned.

Electrosteel Castings (ECL)

CMP: Rs 55/ TP: Rs 72/ Upside: 32%

Rationale: ECL is venturing into steel-making through its subsidiary Electrosteel Integrated (EIL), which is setting up a 2.2 million ton steel plant expected to be commissioned by FY2012E. Further, ECL plans to list EIL to raise ~Rs 3 billion, which is likely to unlock value for ECL. EIL has already filed the DRHP and IPO is expected over the next one month. ECL`s backward integration initiatives through allocation of coking coal mines are expected to result in expansion of EBITDA Margin by 1,304bp over FY2009-12E. The company is also awaiting final environmental clearance for its iron ore mine, which will further lower costs, but has not been factored in its estimates. It recommends `Buy` on the stock, valuing the core business at 8x FY2012E FDEPS and its investments in the steel business at 1x Book Value.

Finolex Cables

CMP: Rs.59/ TP: Rs.85/ Upside: 44%

Rationale: Finolex Cables is poised for a strong growth over the next few years, owing to entry in the verticals of high tension (HT) and extra high voltage (EHV) cables and market share expansion in the existing low tension (LT) cables segment. The rapid ramp up of production at the Roorkee plant has already started delivering results. The company has further increased the capacity at this plant by 50%. The proximity to the growing North Indian markets and tax benefits from this plant are expected to boost the turnaround of the company. Company`s derivatives losses are expected to decline going ahead. By FY2012, these losses are estimated to decline to Rs 240 million from Rs 760 million in FY2010. Angel believes attractive valuations of 6.2x FY2012E EPS and 1.1x FY2012E BV provides a good entry point for investors. It has valued the stock at 9x FY2012E EPS which result into target price of Rs 85.

JK Tyre & Industries

CMP: Rs.185/ TP: Rs.237/ Upside: 28%

Rationale: Given the shortage of radial tyres in the Trucks & Buses Segment, the company is set to fully utilize its enhanced capacity, and that too at higher realizations (70% of India`s total truck/bus radial tyre production), driving strong earnings growth and improving RoEs. Further, the Tornel acquisition turned profitable in FY2010, aided by the restructuring exercise implemented by the company. The stock is available at attractive valuations of 3.9x FY2012E EPS and hence it recommends Buy. At its target price of Rs 237, the stock would trade at 5x, 3.3x and 0.8x FY12E EPS, EV/EBITDA and P/BV, respectively.

Taj GVK Hotels

CMP: Rs 163/ TP: Rs 240/ Upside: 47%

Rationale: Robust growth in foreign tourist arrivals (9.8% growth during January to July 2010 v/s -7.6% in the corresponding period last year) and increased domestic tourist activity is enabling hoteliers to foresee promising outlook going ahead. Signs of improving demand are visible with occupancy rates improving substantially to ~64-65% in 1QFY2011 and Average Room Rates (ARR) expected to rise by 10-15% since October 2010. Considering the revival in demand happening in business destinations like Hyderabad and Chennai, where TAJGVK has presence, we expect the company to be a significant beneficiary in the coming quarters. Moreover, in comparison to its peers, the stock trades at attractive valuations of Rs 10 million FY2012E EV/Room and 13.4x FY2012E EPS. Assigning a target PE multiple of 20x, it recommends a Buy on the stock with a target price of Rs 240.
Note: Above stock recommendations are circulated by Angel Broking and is not a part of Saral Gyan equity analysis.