Sunday, October 3, 2010

>Stocks with 35-50%+ potential

Midcap monitor is a new product from the Religare Strategy team where we
would analyze and provide updates on midcap stocks. In our first edition, we
provide 10 midcap picks (market cap of US$500mn-US$2bn) that we believe
have 35-50% upside by Dec-11. To build a diversified portfolio, we have
chosen stocks across the entire spectrum of Indian growth story – consumption
(Ashok Leyland, Educomp, Glenmark Pharmaceuticals), investment (Voltas,
Sobha Developers, Shree Cement, KEC Intl), Energy (Petronet LNG), diversified
(Sintex), financials (M&M financial Services). We recommend investors to take
significant position in these stocks for alpha performance.

Large caps are not cheap: Indian markets have risen 14% this year, 9% of it in
this month alone, and with Sensex at 19x 12m forward earnings, valuations are
not cheap for most of the large caps. While we continue to be bullish on India’s
long-term fundamentals, we do accept that near-term upside is limited in large
caps. As such, we find most investors are looking for mid-caps that still offer
significant share price upside either due to higher earnings trajectory or
possibility of multiple re-rating or a combination of both. This is our effort to
provide names of some of the midcaps with such upside potential.

Historical performance supports mid-caps: In the Indian markets’ near one-way
trajectory since 2003, small and mid-caps have outperformed large-caps by a fair
margin in 4/6 years. This year too, the BSE Midcap and Small-cap indices have
outperformed the Sensex by 15 and 22% YTD. While past performance is no
guarantee for future returns, we believe there’s sufficient growth potential in each
of our picks to become a large/mega-cap tomorrow. In this context we also
expect hitherto low foreign participation (13% in midcaps, 7% in small-caps vs.
25% in Sensex) to become more broad-based going forward.

Show me the money: Most investors believe that the higher risk of buying
midcaps needs to be justified by higher returns. Hence while screening the
midcap space for value and growth potential; we have shortlisted picks that we
believe will generate 35-50% returns by Dec’11.

To read the full report: POTENTIAL STOCKS