Brokerages retain these 9 mid, smallcaps in portfolio after Q2 earnings, expect 17-43% upside

"Q2FY21 has been a blockbuster earnings season, with big beats on aggregates and improved management commentaries. Nifty profits for the 32 companies that have posted their results have grown 24 percent YoY (versus expectations of 1 percent decline). On the other hand, for the 88 companies in the MOSL Universe, profit growth stood at 28 percent YoY (versus expectations of 1 percent decline). The breadth of earnings beat and consequent earnings upgrades has been the best in recent memory," Motilal Oswal said.

Sharper-than-expected underlying demand recovery in multiple sectors, better-than-expected pricing power/realization; continued cost optimization initiatives; and lower-than-expected provisioning costs in BFSI were key drivers for earnings in the quarter ended September, while corporate commentaries have also turned better, the brokerage added.

Here is a list of 9 mid and smallcap stocks which could return 17-43 percent:

Brokerage: Motilal Oswal

AU Small Finance Bank

AUBANK reported strong earnings, led by robust treasury performance and controlled opex while progress on collection efficiency has also been particularly strong. Further, sharp decline in the moratorium book and improving collection trends eased concerns around asset quality. On the business front, the retail deposit mix has improved sharply, while AUM growth is showing healthy recovery trends. Overall, we expect 2HFY21 to be better as the ongoing festive season should help revive demand in the economy. The current moratorium trends suggest that ~3 percent of the portfolio still remains vulnerable.

Muthoot Finance

After muted performance in Q1FY21, AUM growth rebounded sharply in Q2FY21 as loan demand remained high. While such high level of growth is not sustainable, we expect Muthoot Finance to deliver 20 percent YoY AUM growth in FY21 and 15 percent CAGR thereafter. RoA/RoE is likely to remain robust at 6.8 percent/25 percent over the medium term.

PI Industries

PI Industries (PI) reported strong Q2FY21 performance, driven by 25 percent YoY growth in Custom Synthesis and Manufacturing (CSM) and 33 percent YoY growth in Domestic business. Strong EBITDA growth of 46 percent YoY (on high base) was reported on the back of gross margin expansion (due to mix changes) and operating leverage.

L&T Infotech

LTI has deep domain capabilities; low exposure to segments that faced headwinds (legacy IMS, BPO) should be favourable in the current context. LTI's 26 new client additions and additions across client buckets (two in $10–20 million and two in $5–10 million) were a positive in 2QFY21. Furthermore, successful mining of these accounts should also provide incremental growth. The reinstatement of PAT margin guidance, ability to sustain operational efficiencies (offshore) despite wage hikes (effective Q4), strong deal pipeline, and better H2 seasonality indicate an optimistic outlook.

Indian Energy Exchange

The long-term potential for IEX remains huge, with just around 4 percent market share held by exchanges in India’s power generation. With new product launches, a continued oversupplied market, and IEX’s competitive positioning, we expect volumes/PAT for IEX to increase at a 20 percent CAGR over FY21–23. Given the strong growth and high return profile (RoE of round 45 percent), the stock trades attractively at 23x FY23E EPS.

Brokerage - Emkay Global

Birla Corporation

BCORP is trading at 6.6x FY22E EV/EBITDA and EV/ton of $60 on FY22E capacities, which is lower than the average valuation of our coverage universe and companies with similar capacities. We believe that the valuation multiple for BCORP will re-rate gradually as the company continues with capacity expansion plans. In the sector, companies that expanded capacities have generated higher stock returns. We have a Buy rating on the stock with a price target of Rs 895.

Persistent Systems

Persistent's services business maintains its strong growth momentum on the back of interventions undertaken by the new leadership and focus on large deals. Operating margins have further scope of improvement led by: 1) increasing share of Services business; 2) operating levers such as utilization and higher offshore mix; 3) reduction in losses in the Alliance business; and 4) lower D&A expense as amortization charges likely to taper off. Acceleration in revenue growth momentum, margin sustainability and consistency in operating performance remain the key catalysts for further rerating.

Radico Khaitan

RDCK is the third largest IMFL company in terms of sales/profits and has been outperforming the industry with a volume CAGR of 10 percent, led by faster growth in P&A at 14 percent CAGR since FY17. Big growth opportunity in Vodka and RDCK’s strong 60 percent share in premium Vodka makes it a natural beneficiary as the category becomes more mainstream.

Significant cashflow improvement, outpacing revenue gains and reduction in debt has substantially strengthened the balance sheet.

Varun Beverages

Faster volume recovery and improving mobility trends suggest a behavioural shift toward higher in-home consumption (around 25 percent YoY growth) and on-the-go channel recovery (~60 percent of overall industry sales), setting things right for the CY21E season (March-July period).

Longer-term growth levers of under-penetration in acquired regions and distribution expansion in Juices should help above-industry growth over CY20-22E. Channel checks suggest aggressive Visi-Cooler placements and outlet acquisitions in the acquired regions.

Asset turns should remain on an improving trend with low near-term capex, leading to healthy RoIC improvement, despite our stable margin forecasts.

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