After June quarter earnings, Motilal Oswal has come out with a list of 10 midcap stocks that have fallen by up to 30% and could now return up to 65% in the next one year
The week started on a strong note as the Nifty climbed to new heights on Monday and the Midcap index traded in line with benchmark indices, driven by long build-ups and short covering.
The recovery in the rupee and firm global cues on likely talks between US and China to ease trade tensions boosted investor sentiment.
"Markets are on steroids defying gravity with very strong buying momentum from DIIs and FIIs. The FIIs who have been net sellers till H1CY18 have turned net buyers providing much needed aggressive push to Indian markets," Jagannadham Thunuguntla, Senior Vice President and Head of Research (Wealth), Centrum Broking, told Moneycontrol.
Thunuguntla said that the recently-concluded earnings season has confirmed that Indian corporate earnings have become robust (even though hiccups from PSU banks remain).
But if one were to look at the performance of both indices on a year-to-date (YTD) basis, they will find that unlike large-cap stocks, which drove Sensex and Nifty to their highest-ever points, mid-cap stocks just haven't been performing up to speed.
The Sensex and Nifty have risen by around 12 percent and 9 percent, respectively, so far this year. The BSE Largecap, BSE100, BSE200 and BSE500 indices are all up 3-8 percent for the calendar.
On the contrary, despite recovering from its 2018 lows, the BSE Midcap index is still down 8 percent for the calendar.
Undervaluation of stocks and earnings recovery were the primary reasons behind the index recovering from its lows. But for stocks that are still under pressure and quite far from their 52-week highs, the weakness stems from fundamental underperformance and overvaluation. These companies will have to report even better earnings performance to quickly recover.
Half of the BSE Midcap index's constituent stocks are still in the red for this year. Of the lot, more than 40 stocks are down between 10-90 percent, while only 19 stocks are up 10-60 percent.
Every expert on the Street agreed that the sell-off in mid-cap and small-cap stocks was warranted as these indices had surged 47 percent and 57 percent, respectively, in 2017.
Despite having fallen that much, most of these stocks are still highly valued, considering their earnings for the June quarter. Experts said that if earnings recovery does not take place in next few quarters, these stocks could fall further.
"I do not know about prices, but feel that most midcaps and smallcaps are still highly overvalued. If the earnings do not grow aggressively this year, there could be a further correction in prices," Raghvendra Nath, Managing Director, Ladderup Wealth Management, told Moneycontrol.
After June quarter earnings, Motilal Oswal has come out with a list of top 10 midcap stocks, which have fallen by up to 30 percent, and could now return up to 65 percent in next one-year period.
Among the list of stocks was Petronet LNG, which corrected 21 percent from its 52-week high, and could now return 43 percent.
"Dahej continued over utilisation despite the fact that LNG prices had almost doubled YoY. We expect the same to continue. Kochi terminal's utilization would increase as Kochi refinery stabilizes and Kochi-Mangalore pipeline gets completed. Dahej would get further boost when it's expansion from 15mmtpa to 17.5mmtpa completes early next calendar year," Motilal Oswal said.
Another stock, which comes under the FMCG basket, is Emami. The stock, which is the top pick in consumer space, is expected to rally 16 percent to Rs 665.
The reasons to pick this stock among mid-caps are (a) normalisation of wholesale trade where Emami's share is higher than peers, due to which its pace of earnings growth over a low base is likely to be very strong (b) likely healthy growth in existing categories, where it has a dominant market share and (c) best-of-breed R&D and A&P resulting innovative products backed by strong marketing.
Emami's Q1 earnings missed analysts' estimates on all accounts. Domestic volumes grew just 18 percent YoY (on a low base of an 18 percent fall last year) and EBITDA margin expanded 490 bps YoY.
Of the 10 stocks on Motilal Oswal's list, RBL Bank has fallen the least, having declined only 3 percent from its 52-week high due to its strong business performance.
"NIM's expanded 6 bps QoQ (one of the very few banks to report NIM expansion) which coupled with strong fee growth enabled inline earnings. RBL further provided on its MFI portfolio taking the PCR up by 284 bps QoQ to 60.4 percent even as the credit cost in rest of the portfolio has moderated," Motilal Oswal said.
RBL guided for further provisions toward the balance one-third stressed MFI loans over Q2/Q3; bank guided for 1.5 percent return on assets for FY20E and 40-45bp of tier 1 capital consumption per quarter.
The research house expects the stock to rally 14 percent to Rs 650.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.