Watch experts decode 'The rise of ESG investing' on October 29 at 4pm. Register Now!
Last Updated : May 28, 2019 02:51 PM IST | Source: Moneycontrol.com

Broad market bets: Pick these 10 mid and small-cap stocks for next five years

Experts feel that it is the right time for investors who are looking to build a long-term portfolio to invest in the broader market space

The S&P BSE Midcap has risen 76 percent and the S&P BSE Smallcap index has added 64 percent since May 26, 2014—the day PM Narendra Modi assumed office for the first time. In the same period, the S&P BSE Sensex rallied 60 percent.

The outperformance of small and midcap indices is expected to continue during Narendra Modi's second term as well, suggest experts.

However, for the last 18 months, these indices have been under pressure due to a sharp rise in crude oil prices, corporate governance issues, muted earnings growth and uncertainty around the general elections among other issues.


As of May 27, the S&P BSE Midcap index is trading 11 percent below its 52-week peak and the S&P BSE Smallcap index is down about 15 percent from its 52-week high.

According to a brokerage report, one-third of the stocks in S&P BSE500 have lost more than 30 percent of their market capitalisation. Valuations of mid and small-cap stocks, which were frothy and had a premium over largecaps until last year, have now cooled off significantly due to sharp corrections.

“As per Bloomberg data, the BSE MidCap is currently trading at 15.4x one-year forward PE (which is lower than its three-year average of 19.7x), the BSE SmallCap at 13.2x while the BSE Sensex is trading at 16.1x PE,” Prabhudas Lilladher said in a report.

Experts feel that it is the right time for investors who are looking to build a long-term portfolio to invest in the broader market space.

“The performance of broader indices has remained subdued for about more than a year despite the benchmark indices scaling record high levels,” Dinesh Rohira, CEO & Founder 5nance.com told Moneycontrol.

“Further, individual mid and small-cap stocks have declined far more than their fundamental outlook, and therefore, offering a perfect opportunity to build exposure in category to create wealth through value play,” he said.

Rohira further added that he expects the broader market to outperform in long term against headline index.

Here are 10 small and mid-cap stocks collated from different experts that investors can buy for the next 5 years:

Brokerage Firm: Centrum Broking

Godrej Agrovet:

Godrej Agrovet Ltd (GAVL) has set up processing facilities to develop a modern operating platform across key agriculture vertical. The company has leveraged its in-house R&D prowess to create strong brands along with a robust distribution network with 6,000 distributors.

Varroc Engineering:

Verroc Engineering designs, manufactures and supplies exterior lighting systems, plastic and polymer components, electrical-electronics components and precision metallic components to PC/CV/2W/3W and OHV OEMs.

The company has a diversified geographic mix: India (34.7 percent), Europe (41.8 percent), North America (22.3 percent) and others (1.2 percent).

The company has a sticky relationship with leading domestic original equipment manufacturers (OEMs) like Bajaj, Honda Motors and Royal Enfield.

Being supplier to JLR, Bentley and Tesla, it can capture the growth in the LED lighting segment. Its footprint covers all major passenger vehicle markets globally providing crucial diversification.

Can Fin Homes:

Can Fin Homes is a mid-sized housing finance company catering to low-cost housing needs in the average ticket size of Rs 14-16 lakhs. Loan book stands at Rs 18,381 crore as on March 31, 2019 with 67 percent to salaried individuals and insignificant exposure to builder loans.

The business has started showing signs of improvement. We expect the loan book to steadily grow from hereon and show improvement in the asset quality along with available excess provisioning.

The loan book CAGR is expected at 26 percent over FY19P-21E with gross NPAs declining to 0.4 percent to result in 1.9 percent RoA and 22.3 percent RoE by end FY21E.

ICICI Securities:

ICICI Securities is the largest equity broker by brokerage revenues offering a wide range of financial services including financial product distribution and investment banking to retail and institutional clients.

The brokerage firm has a strong distribution network (~200 branches, 6,500+ channel partners & 3,100+ bank branches) helping noncyclical MF distribution business growing well (~27 percent of 9MFY19 revenue).

ICICI Securities has a strong customer base on the back of the convenience of the 3-in-1 platform (bank-broking-DP). Strong investment banking and improving advisory services platform to aid growth in the future.

KEC International (KEC):

KEC, a flagship of the RPG Group, is present in the verticals of power transmission, power systems, cables, railways, telecom and water.

Higher share from non-T&D (incl. SAE) businesses such as railway, civil, solar (~30 percent in FY19 vs 26 percent last year) is likely to aid margins and overall performance.

The current order book of Rs 20,307 crore (1.8x FY19P revenue) provides visibility with 50 percent being global orders. Enquiries in the international markets and domestic railway segment will help sustain order book position.

Brokerage Firm: Prabhudas Lilladher

KEI Industries:

KEI Industries (KEI) fortunes are linked to government spends in the power, housing and metro projects as well as private sector capex. It reported robust numbers with revenues growing 22.2 percent YoY and 15.8 percent QoQ. EBITDA grew 36.1 percent on a YoY basis and 16.9 percent on a QoQ basis in Q4.

The management has guided 18-20 percent growth in revenues in FY20 on the back of demand from the conversion of refineries to meet BS VI norms, metro projects, distribution strengthening in power sector and state orders for underground cabling to improve overall efficiency and reduce AT&C losses.

We forecast KEI revenues to grow at 16.1 percent CAGR from FY19-21. Its profit should grow at 26.7 percent CAGR over the same period on the back of strong volume growth which will result in better-fixed cost absorption strong volume growth. A richer product mix will help push EBITDAM to 10.6 percent in FY20E and further to 10.7 percent in FY21E.

Mold Tek Packaging (MTEP):

MTEP is among the leaders in rigid packaging in India. It revolutionised the paint industry by introducing plastic pails in lieu of metallic cans. The company also offers packaging solutions to the Food & FMCG industry which is likely to be the key growth driver going forward (expected to increase from 18 percent in FY18 to 26 percent in FY21E).

The paints segment will continue to witness steady growth as new dedicated capacities for Asian Paints will go on stream. MTEP has shifted 2 machines from RAK to India and is evaluating the future of the plant in RAK.

Further volume offtake from Vizag and Mysuru, higher than expected traction in edible oil/ghee segments, the addition of HUL and Hutsan in the ice cream segment and new clients in other F&F segments provide visibility for 20 percent volume growth in FY20E and sustenance thereafter.

Gokaldas Exports:

GEXP is one of the largest exporters of garments from India, with exports contributing to more than 80 percent of their revenues. Lack of focus on improving efficiency, reducing wastages and lead time and developing customer relations led to sub-optimal performance leading to losses in most of the years.

During FY19, the top line grew 13.8 percent to Rs 11,745 million on back of improvement in efficiencies, the addition of new clients (seven clients added) and increased wallet share from existing customers.

According to our rough cut estimates, the revenue is expected to grow at 18.1 percent CAGR over FY19-21E, EBITDA at 51.1 percent CAGR and PAT is likely to grow at 66.3 percent CAGR.

Analyst: Jayant Manglik, President - Retail Distribution, Religare Broking Ltd

Cummins India:

Cummins is a leading manufacturer of engines and other power generation products. The company has reported strong growth in the domestic market in recent quarters.

Further, a pick-up in demand in all infrastructure segments (construction, water well), increasing penetration in rail as well as marine and high demand from data centres will drive the growth in the domestic market.

Further, investments in product enhancements (e.g. new power train solutions) and strengthening market share are the key growth triggers. On the profitability front, stability in commodity prices, as well as value engineering/value-added products, shall lead to an improvement in margins.

Indraprastha Gas:

We expect IGL’s revenue and PAT to grow at a healthy pace, led by network expansion, increasing conversion to CNG and economic benefits of CNG/PNG vs auto fuels.

IGL also stands to benefit from an increase in the award of geographical areas for gas distribution and extension of market exclusivity for city gas distributors.

Further, the recent allocation of distribution licenses in three areas in 10th bidding round to IGL would also aid future growth.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Note: The story has been updated with the latest data for BSE Midcap and BSE Smallcap indices. 
First Published on May 28, 2019 10:06 am