to out-buffet buffet? Easy, just follow Ben Graham. Warren cut his
teeth under him and rates his book The Intelligent Investor the
best book on investing ever written. If you decide to do a Graham
now, your timing couldn't be more perfect: the man was a proponent
of what we now know as value investing-exploiting low valuations
to pick winners with sound fundamentals. And if you decide to do
a G now, you certainly won't be alone: Graham is the reigning deity
on Dalal Street. Analysts scouring the financial statements in search
of value, mutual funds seriously evaluating the logic of launching
mid-cap funds, the market is filled with people hoping to make a
pile while the valuations are still down. "We think this is
the right time to invest in mid-cap stocks," says T.P. Raman,
the Managing Director of Sundaram Mutual Fund, which recently launched
a mid-cap fund. "Valuations are low, and the risk-reward equation
If everyone is picking them, don't you run
the risk of being a lemming all over again if you pick mid-cap stocks?
You don't, and that's because most people are doing it all wrong.
"The entire mid-cap thing is already being overplayed,"
rues Sandeep Talwar, an analyst with online brokerage Sharekhan.
"Small-cap junk, which hadn't moved in the past seven-to-eight
years, has suddenly gone from Rs 2 to Rs 10."
Our recommendation: seek value. Still, there
are some caveats. One, don't invest in a mid-cap stock unless you
know something about the quality of the company's management. Two,
if a company is available cheap given its quality of assets, stop
and ask whether it is capable of leveraging them to improve profitability?
If it isn't, these very assets could make the company a takeover-target.
That's good news for investors but only if the promoter can be edged
out. Three, if a company claims to have turned around, evaluate
the sustainability of this revival. And four, look for companies
that did well even when the industry to which they belong fared
badly. That said, as Alroy Lobo, the head of research at Kotak Securities,
points out, "Mid-cap stocks have the ability to beat benchmark
Here are five of the species: profitable (consistently
so), at attractive valuations, and with attractive prospects. What's
It's simple really: the company is the largest
manufacturer of ductile iron pipes used in water and sewage transportation,
it recently increased capacity, acquired a strategic stake in competitor
Lanco thereby ending a period of rampant price undercutting in the
industry, and, bonus, bonus, the promoters own 61 per cent of the
equity. "It is a technology-heavy business that is viewed as
a commodity one," says S. Ranganathan, an analyst at LKP Securities,
who believes only their financial woes is preventing most states
from moving to ductile iron pipes (replacing the old cast iron ones)
for their waterworks. He may be right: Electrosteel's order book
already lists some proactive southern states. At a P-E multiple
of around 6, it's a steal.
Hikal (Rs 148)
Fine, you haven't heard of the company. It
makes thiabendazole (TBZ) and sells all of it to Merck's US operation.
It also makes some agrochemical and biotech intermediates and formulations-Sygenta,
the behemoth formed by the merger of Novartis and Zenecca, is its
biggest customer for agrochemicals-and recently acquired Novartis'
Panoli plant that makes quinalphos.
The raw material will continue to come from
Novartis, which will also pick up the finished product. Then, there's
a contract manufacturing initiative in the biotech domain.... Don't
you wish you'd heard of Hikal earlier?
Vesuvius (Rs 75)
We must be crazy to recommend a company that
makes a living supplying refractories to the ailing steel industry.
Not quite: Vesuvius has consistently grown its topline and bottomline
through some smart diversification moves. Two recent acquisitions-Carborundum
Universal's Vizag plant and Premier Refractories-have increased
its non-ferrous footprint. Another in the making (of Foseco's lining
business) should reflect in the company's financials in the coming
Put simply, the company's dependence on the
steel sector is decreasing. There's more: from selling products,
Vesuvius has moved to hawking solutions; 35 per cent of its business
comes from design, logistics, and maintenance. This stock, despite
its name, isn't all that volatile.
Balrampur Chini Mills (Rs 149)
BCM is, arguably, India's largest and most
efficient sugar company. Sugar may be a strange business with even
stranger must-for-success parameters, but the company comes out
tops in most.
The company's focus on operational effectiveness
means it extracts, on an average, more sugar per tonne of cane crushed
than its rivals. Its relations with farmers is amicable, ensuring
a steady supply of cane. And it proposes to enter the lucrative
branded sugar market soon.
Then, there's the new market opportunity presented
by the government's decision to allow a 5 per cent concentration
of ethanol in blended fuel-ethanol is a by-product in the manufacturing
of sugar. At its current valuation, the company is a sweet deal.
Sundram Fasteners (Rs 311)
The buzz created by the awards bestowed by
General Motors on its Indian supplier of radiator caps has ensured
that most people know of SF. We'll make this quick: in a period
that saw most auto ancillaries struggling to maintain profitability,
Sundram Fasteners grew sales and profit, and actually reduced its
"It is not only the most efficient auto
ancillary in India, but among the most competent ones in the world,"
gushes Jigar Shah, Head of Research, K.R. Choksey. If the anticipated
upswing in auto happens, SF is your stock.