Best midcap stocks to invest in cement, construction and textile sector

Best bets

Parmar of Emkay feels that despite a decent run-up in the past few months, cement, capital goods, engineering, IT and banking stocks have room to deliver 25-30 per cent return, on an average, over the medium term. Following is a low down of some of the top picks of experts:

Cement stocks

Cement stocks -- large-cap or mid-cap -- are still hot picks for many market experts.

The demand-supply mismatch resulting in firm prices and higher capacity utilisation is here to stay for at least two more years, irrespective of regional presence.

In September, cement majors like Gujarat Ambuja, ACC and the AV Birla group reported healthy growth of about 16 per cent, on an average, in their dispatch numbers.

Other players are also expected to report similar growth. Cement prices too continue their northward journey. The average price for the July-September period reported a staggering growth of 29 per cent year-on-year at Rs 204 a bag (of 50 kg), thanks to the hectic activity in the housing, infrastructure and industrial segments.

UltraTech Cement, Shree Cements, JK Cement, Madras Cement, India Cement, Mysore Cement and Kesoram Industries are market experts' top picks. And many of them are trading at reasonable valuations, given the robust growth potential.

Construction stocks

After being bruised badly by the market in the recent past, as they plunged by 20-30 per cent from their peak levels, some construction stocks such as Nagarjuna Construction, Gammon, IVRCL, Era Construction and HCC have recovered marginally, but they are still attractively priced.

Though their performance in the June quarter was not so impressive, despite strong demand, and some companies also faced margin pressures owing to rising input costs, market players are confident about their positive outlook.

In fact, at the end of the June quarter, most companies had healthy order book-to-sales ratio in the range of 3.5-5x.

Textile stocks

The domestic textile industry has failed to deliver returns and has underperformed all sectors despite the immense potential in the business. However, selective stocks such as Gokaldas Exports and Alok Industries seem to be good buys at present.

Gokaldas Exports

Gokaldas Exports, the country's largest garment exporter, trades at a P/E of 14x and 10.7x for FY07E and FY08E respectively. Mutual fund houses such as Fidelity and Prudential ICICI mopped up close to 8 lakh shares in early September at around Rs 625.

The company has drawn an aggressive expansion plan that includes setting up of new units at Chennai, Hyderabad and Mysore, increasing its client base and improving the product portfolio. It also intends to take its garment capacity close to 40 million pieces a year.

Besides, the textile firm will invest Rs 100 crore (Rs 1 billion) in setting up a unit through its group firm Gokaldas Exports Apparel & Textile Park in the 400-acre special economic zone near Bangalore to produce 1.5 million pieces a year.

Alok Industries

After Welspun and GHCL, Alok Industries, a manufacturer and exporter of home textiles, apparel fabrics, garments and polyester yarns, has been another player going in for global acquisitions.

The acquisition of 60 per cent stake in Mileta International of Czech Republic -- with its well-known brands -- for euro 13.97 million, will give the company a foothold in the highly competitive and fashion-conscious European market.

Besides, the third phase of its Rs 1,100 crore (Rs 11 billion) expansion plan is expected to complete by March 2008. All this initiatives will accelerate its growth rate and the stock is available at attractive valuation of 6.5x and 4.9x for FY07E and FY08E, respectively.

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