Cherry-Picking Fallen Angels — Part 2 | Outlook Business
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Cherry-Picking Fallen Angels — Part 2
Here is a list of stocks that have fallen in the small and mid-cap carnage despite reporting robust numbers

Prathamesh Mulye

TVS Motor   

TVS Motor also suffered a similar fate as other mid-caps with the stock plummeting more than 25% from its high of 767 in January 2018 despite strong sales volume performance. TVS Motor’s volume surged by 32% YoY driven by the success of new Apache, Jupiter and NTORQ (see: High burn). However, higher input cost, increased dealers’ margins and one-time promotional expenses hit the margins and possibly spooked investors. Despite Q4FY18 being a better quarter for its motorcycle segment, margins fell below the previous quarter.

But analysts believe that the rising cost of raw materials should not perturb investors anymore as the company has implemented two consecutive price hikes in April and May to pass on the inflation cost and dealers’ incentive to consumers. “When there is strong demand in the market for a company’s models, it has a decent pricing power. TVS’ sales volume reflects the demand for its models and the company has already taken the price hike for majority of models in the month of April and May into account. These would take care of the major portion of cost inflation,” says Mitul Shah, vice-president — research, Reliance Securities.

The depreciating rupee is also expected to support margins as the company outperformed the industry in exports. Export volume grew by 49% YoY to 160,994 units due to a 50% and 82% rise in two-wheeler and three-wheeler volume, YoY, respectively.   

Rich product mix and strong brands are expected to help TVS Motor ride the rural consumption growth story. “We envisage double-digit volume growth for the company fuelled by improving rural demand and favourable monsoon. TVS is better placed in the domestic two-wheeler space with  a strong product portfolio at present,” says Shah. At 555, TVS trades at 27x FY19 earnings compared with 17x and 16x for rivals Hero MotoCorp and Bajaj Auto.

Natco Pharma 

While its peers are grappling with pricing pressure in the US and lacklustre growth in the domestic market, Natco Pharma reported net sales growth of 31% in Q4FY18 as compared to Q4FY17. The drug maker even rewarded its employees with a one-time special bonus in June for the second year in a row. But the Q4 results have failed to arrest a slide as the stock dropped 22% from its high of  1,034 in January. 

Natco Pharma’s revenue jumped 36% YoY in FY18 driven by windfall from limited competition in segments in which the company operates in the US. The company has carved out a niche market for itself in the US by tapping into areas like generic Copaxone where there is less competition (see: Standing out). Copaxone, which is the most prescribed drug for a brain-related disease — relapsing multiple sclerosis (RMS) in the US, is touted to deliver revenue for Natco Pharma, before losing steam in FY20 as its rivals launch their generic versions. “Natco’s product strategy of focusing on segments where there is less competition has handsomely paid off. Unlike other players, they haven’t chased all the products and have focused on areas where there is limited competition,” says Praful Bohra, senior analyst, Equirus Securities.   

While the windfall from the US market is set to continue, the company plans to focus on three specific markets — India, Brazil and Canada. The management’s decision to also focus on markets apart from the US comes on back of rise in revenue from Brazilian and Canadian markets. These two markets contributed US$4.5-5 million and C$15 million in FY18. 

Natco Pharma is also a leading player in oncology segment with 30 products. The segment has grown at 19% CAGR in last five years contributing significantly to revenue. “Even in India, Natco has been operating in very niche market and has largely focused on oncology segment through diverse range of drugs which has worked well for them,” says Bohra. Analysts also believe that the momentum in oncology segment will continue on the back of incremental launches. 

With a series of positive developments including the much-awaited launches for gCopaxone 20mg and 40mg and the launch of gTamiflu, which is an anti-viral for the treatment and prevention of influenza A and B, analysts are buying the Natco Pharma story. “With proven R&D capabilities post successful launch of multiple complex generics and a much stronger balance sheet, Natco has now created a strong platform to make relatively aggressive investment (versus the past) to move into the next growth orbit,” says Nitin Agarwal of IDFC Securities in his report. At 807, the stock trades at 21x FY18 earnings making it an attractive bet as compared to some of its peers like Indoco Remedies and Torrent Pharma which are trading at 40x and 35x respectively. At current valuation, Natco Pharma could be a good addition to an investor’s portfolio.

Mahindra Cie Automotive

Like Natco Pharma, Mahindra CIE Automotive’s drop in stock price has also made it an attractive bet. The stock had fallen more than 20% since the start of the year and is recovering. The stock rallied more than 7% on June 30 after 4.9% of the company was traded in a block deal. 

The automotive components supplier reported healthy operating performance with consolidated revenue coming in at 19.11 billion up 25.6% YoY in Q4. Analysts believe positive exchange rate drove up the sales by 10% on a YoY basis as the revenue from Europe grew 26.3% YoY to 11.41 billion. The company has also started executing orders which it had bagged in the past, thus, driving up the revenue. In Europe, the company has begun supplying crankshaft from its local forging division. 

Mahindra CIE has also implemented several initiatives of cost rationalisation, which have started yielding positive results (see: Speeding up). EBITDA margin increased 254 bps YoY and 170 bps QoQ to 12.1% primarily due to lower employee and other expenses in Q4FY18. The management believes that cost-cutting exercise and operating leverage will further expand margins by 300-400 bps in the next three to four years.

After the fall, earlier this year, investors are lapping up the stock post the Q4 results. Analysts believe there is more upside to the company. “We feel Mahindra CIE provides a unique Indian auto component play, which has a global footprint with global promoters. We expect the turnaround to be significant. The company would find a way to increase efficient and profitable utilisation with no major capex over the next couple of years,” says Nishit Zota of ICICI Securities in his report. On one-year forward basis Mahindra CIE is currently trading at 15x as compared to its peers like Bharat Forge and Ramkrishna Forgings, which are trading at 32.6x and 18x respectively. As the company has a strong balance sheet, sensible management and reasonable valuation, it could be a good bet to ride the rise in automobile demand.

This is the second of a two-part series. You can read part 1 here.

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