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Last Updated : May 31, 2019 12:44 PM IST | Source: Moneycontrol.com

Buy midcaps as history suggests broader market performs well in the first year of new govt

We can expect the next two quarters having stability in the capital markets and policy decisions during this time shaping the course of markets in the future.

Moneycontrol Contributor @moneycontrolcom
 
 
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Siddharth Sedani

The return of the incumbent government has injected strength into the stock markets; benchmark indices created history last week when the Sensex crossed the 40,000 mark, and the Nifty rose above 12,000.

The RBI policy meet and the release of the Union Budget would be the key events to watch out for in the near future. Also the markets would look at global factors like the US-China trade war and the resolution of issues facing the economy.

Close

Though benchmark indices Sensex and Nifty are close to all-time highs, the broader market, particularly the mid and small cap segment, has been beaten over the past one and half years. The valuation gap between mid-caps and large-caps is down.

Mid and Smallcaps have remained under pressure for the last 18 months, but now with NDA coming back into power, we can expect investors to take comfort in the midcap space where there is sustainable earnings with a longer horizon of 2-3 years and inflows could resume in them.

Flows into domestic mutual funds, usually a key driver for midcaps, should revive as the political uncertainty has ended. Also the large cash pile of domestic funds which were sidelined on account of the elections, may increase flow into the midcaps. The historical trend also suggests the broader market usually performs well in the first 12-18 months of a new Government.

The long term economic backdrop for the Indian economy looks good, real GDP should grow at a faster pace in the long term. Overall, we can expect the next two quarters having stability in the capital markets and policy decisions during this time shaping the course of markets in the future.

The long-term investment opportunity in India remains firmly in place, so the right time has come to accumulate below mentioned midcap stocks in a gradual manner.

L&T Technology Services: Buy | Target: Rs 1,940 | Return: 12 percent

The company has reported a revenue growth of 27.3 percent in Q4 FY19 YoY and in dollar terms the growth was 17.8 percent while constant currency growth stood 20 percent, mainly driven by its process, transportation and medical devices verticals.

For the full year, its revenues grew 36 percent in rupee term and 26.5 percent in constant currency.

On full year basis, LTTS' EBITDA margins stood at 18 percent against 15.5 percent in FY18, an improvement of 250 bps.

During the quarter, LTTS won 9 multi-million dollar deals across all industry segments. On a YoY basis, LTTS has increased its $50 million+ clients by 2, $10 million+ clients by 4 and its $5 million+ clients by 10.

Aditya Birla Fashion Retail: Buy | Target: Rs 247 | Return: 17 percent

Pantaloon's poor performance led to ABFRL's Q4 FY19 revenue and EBITDA slipping below our estimates. For FY19, though, Pantaloons’ 12 percent / 35 percent revenue / EBITDA growth is encouraging. Madura Lifestyle brands reported a steady 11 percent / 15 percent revenue/ EBITDA growth in FY19 (SSSG 5.3 percent growth) following a couple of years of subdued growth. These brands account for around 53 percent of sales and almost all EBITDA; hence, the brighter prospects of this division keep us upbeat about the company.

In the year 2018-19, the company added 40 Pantaloons and 300 Madura stores. It expects the relentless network expansion to continue in FY20 as well. With the higher marketing spends, vigorous store expansions, brand extensions and product value enhancement, we expect the sales and profitability momentum to persist. Also we are expecting revenue/EBITDA CAGRs of 12 percent/7.6 percent over FY19-21.

We upgrade rating to a buy, with a lower target price of Rs 247 based on 20.6x FY21e EV/EBITDA.

(The author is Vice President - Equity Advisory at Anand Rathi Shares and Stock Brokers.)

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

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First Published on May 31, 2019 12:44 pm
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