Harendra Kumar of Elara Capital said given the overall robustness in earnings recovery, 2019 could well be a year of midcaps and smallcaps.
It would have been an year of negative returns if not for the up move seen in last two months of 2018. On October 26, Nifty50 was down 4.7 percent year-to-date, but thanks to November rally, it closed 2018 with a gain of 3 percent.
Even for broader markets, the November rally helped BSE Midcap and Smallcap indices cut losses and end the year lower by 13.4 percent and 23.5 percent, respectively.
The sharp slide in crude oil prices, rupee appreciation from historic lows, hope of rate cut on favourable macros, etc. helped the benchmark indices turn positive and broader markets cut losses.
Now the year 2019 is likely to be good for midcaps and smallcaps, experts said, the return could be in double-digits and many stocks are expected to show better earnings growth.
"Sharp decline in crude prices, appreciation in INR versus USD, and fall in bond yields augur well for the market, however, uncertainty regarding elections in 2019 might keep markets volatile," Equirus Securities said.
Mid and small-cap earnings were hurt more due to crude, currency and interest cost increase. "Therefore, reversals in the same should lead to better earnings revival. We believe 2019 will be a good year for small & midcaps," the research house said.
Harendra Kumar - Managing Director, Institutional Equities, Elara Capital also told Moneycontrol that midcaps and small caps have seen sharp correction in 2018 and several companies with solid fundamentals are available at reasonable valuations now.
Here is a list of 15 mid and small-cap stocks that could return 15-34% return in 2019:
Brokerage: Religare Broking
Akzo Nobel India | Target: Rs 1,955 | Return: 21%
Indian paint industry is expected to grow by 13 percent CAGR over FY18-21E to reach Rs 80,089 crore, driven by government initiatives, increase in rural spends, boost in infra projects, favourable automobile industry trends, etc. This, along with demand uptick, stabilization of input cost, and higher contribution from decorative segment is likely to boost Akzo's revenue. Also, recent reduction of GST rates in paints sector from 28 percent to 18 percent is a positive for consumer demand. Moreover it has an added advantage of being a debt free company with negative working capital and strong balance sheet.
Emami | Target: Rs 496 | Return: 22%
We expect the company’s growth to be driven by revival in rural demand & wholesale distribution channel, improved product mix, new launches and focus towards introducing more healthcare products. We estimate its revenue and PAT to grow by 8.7 percent & 12.3 percent CAGR respectively over FY18-21E on back of its focus on growing its power brands such as Kesh King, Navratna, Zandu and Fair & Handsome.
Indraprastha Gas | Target: Rs 315 | Return: 20%
Low penetration of CNG/PNG provides significant expansion opportunity for IGL in its existing areas. Further, government’s focus on CNG/PNG, network expansion as well as economic benefits of CNG/PNG will lead to sales and PAT CAGR of around 20 percent and around 18 percent respectively (FY18-21E). The company’s ability to pass on increase in gas cost, low working capital and leveraging of existing infrastructure will support future growth.
Rallis India | Target: Rs 216 | Return: 25%
In Indian agriculture, utilization of crop protection and agrochemicals in improving farm productivity is still low. This provides an immense scope for market expansion for Rallis. In addition, the government has set an ambitious target of doubling farmers’ income by 2022, which could lead to increase in demand for agri inputs. Improvement in returns (ROE and ROCE) and efficient working capital management are the other key positives. The key risks to our rating are 1) deficient north-east monsoon may temporarily impact the domestic business in the coming quarters 2) weak crop prices and surplus channel inventory.
TeamLease Services | Target: Rs 3,244 | Return: 15%
Going forward, we expect TEAM's strong performance to continue given strong industry trends, its stellar past record of 20 percent plus growth, diversified portfolio (26.7 percent business from top 10 clients), wide pool of candidates (10 million), debt free balance sheet and healthy return ratios.
Voltas | Target: Rs 697 | Return: 27%
Led by revival in the consumption and capex cycle and company’s efforts towards brand building, enhanced product offerings and widening reach, Voltas' consolidated net revenue and PAT are estimated to grow by 11.5 percent & 13.9 percent CAGR respectively over FY18-21E. The growth is likely to be driven across business segments. Volume offtake in Unitary Cooling Products is likely to improve in the coming quarters post the recent cut in the GST rates of ACs (from 28 percent to 18 percent). Further, with healthy and better quality order book, the revenue growth and margin trajectory in EMP business should improve going forward.
Whirlpool of India | Target: Rs 1,590 | Return: 22%
WIL remains optimistic on delivering a double digit growth over the next few years given low penetration levels, rising disposable income and higher GDP growth. We believe with positive industry growth trends and recent GST rate cut coupled with WIL’s expanding distribution network, new product launches, in-house manufacturing facilities, healthy return ratios and negative working capital makes it one of our preferred pick in the sector.
Brokerage: ICICI Direct
City Union Bank | Target: Rs 225 | Return: 22%CUB's lending philosophy of giving small ticket secured loans helps control
asset quality. Around 1:1 loan to collateral ratio was maintained with
unsecured loans at 1 percent of loans. It did not go overboard on growth in peak years of 2007-08.
The bank maintains its RoAs more than 1.5 percent & RoE more than 15 percent consistently on the back of healthy credit growth, strong NIMs & controlled asset quality. CUB is well placed among regional players and on the capital front with tier I ratio at 14.7 percent. It has historically traded at a premium to other regional banks led by better return ratios.
Jyothy Laboratories | Target: Rs 240 | Return: 20%Jyothy Laboratories (JLL) has six power brands (Ujala, Henko,
Maxo, Pril, Exo, Margo). Its planned expansion in the ayurveda segment is
expected to enhance its revenue from personal care segment in the
foreseeable future.JLL has directed its focus primarily to power brands in a bid to
improve visibility and aid brand recall. It has been able to reduce its debt over the years thereby resulting in net profit CAGR of 28.5 percent. The stock is trading at around 25 percent discount to our FMCG universe thereby making it an attractive investment opportunity.
Ramco Cement | Target: Rs 760 | Return: 19%
The Ramco Cement is well placed to benefit from rising cement demand in southern region. In addition, Ramco's penetration in the eastern region is expected to further boost cement volumes (CAGR of 14.0 percent) in coming years.
Ramco is also one of the most cost efficient cement producers in south India, with cost advantage emerging from captive power of 175 MW and strategic plant location (split grinding unit near the markets and clinker plant near the mines).On the cost front, the changes in axle load norms would provide additional
loading capacity, thereby reducing freight costs by 6-8 percent. The sharp fall in crude oil prices (down 30% from recent high) will also help reduce petcoke prices and freight costs going forward.
Somany Ceramics | Target: Rs 410 | Return: 27%Volume growth should pick up in second half FY19 and FY20. Additionally,
strict credit control measures incorporated by the company have made it
structurally strong. Thus, we expect double-digit volume growth in FY20.
Somany took price hikes across product portfolio to the tune of 2.0-2.5 percent for tiles and 5-6 percent for sanitaryware & faucets in Q3FY19. Secondly, the 3.5 MSM GVT capacity addition in Andhra Pradesh is expected to be commissioned in February, 2019, which will increase share of value-added products in its portfolio (around 21 percent currently). Thirdly, gas prices (currently around Rs 40/SCM) are expected to drop due to the recent sharp fall in crude oil prices. Thus, we believe EBITDA margins have bottomed out at 6.7 percent in Q2FY19 and could improve to 10 percent in FY20.
Brokerage: Rudra Shares and Stock Brokers
Amara Raja Batteries | Target: Rs 875 | Return: 18%
Brand AMARON continued to perform exceptionally well in the four wheeler and two wheeler segment, with wider market reach and dynamic product portfolio management.
Introduction of electric vehicles in India has been slow, and is expected to gain speed in the coming years providing tremendous opportunities for battery players, directly benefitting Amara raja.
Having said that, several risks do exist - One is a prolonged slowdown in automobile sales and secondly, the rise in input costs. Rupee depreciation has put pressure on costs. Although, after rising sharply and impacting profitability in the first half, prices of lead, a key raw material, softened recently. This has stoked hopes of a revival in profitability.
India Glycols | Target: Rs 400 | Return: 28%
Company holds the distinction of being the only green petrochemical company of its kind. Barring tepid profitability, September quarter results stood remarkably good.Owing to deficit of Mono Ethylene Glycol in India, company has a ready market available. Also, Major rehaul in the Govt policy in the state of
Uttar Pradesh for portable alcohol has opened up an opportunity.
In addition, multiple initiatives have been taken to develop more Green products to meet the rising demand of environment-friendly surfactants and specialty chemicals based on renewable resources like Rice bran oil, Coconut oil, Groundnut oil, Soybean oil, Palm oil, Cashew-nut shell liquid etc. Apart from the negative global event, outlook for FY19 looks promising both in value and volume terms for IGL.
Uflex | Target: Rs 370 | Return: 34%
Management has maintained its guidance for double digit volume growth in FY19, on the back of additional focus to develop high-margin value added products.In coming 3-4 years, company see additional revenue of around Rs 1,200 crore from sales of Aseptic Liquid Packaging Material & Rs 300 crore from
sales of Aseptic Filling Machine.Fast tear strip foil will prove to be a game-changer for Pharma industry
globally & has potential growth market of 5000 tones annually in India.
With patent issuance, company gets exclusive right of manufacturing & sale of this special BOPET film in US, Europe and India. Although, in India NGT had already issued an order banning the use of PVC. Still there was no substitute available. However, this patent will substitute the PVC.
Pondy Oxides & Chemical | Target: Rs 510 | Return: 34%
Company has a large clientele which includes big names like Amara Raja Batteries, Exide Industries, J K Tyres, Supreme Industries, Kisan, Shriram EPC, Chemplast, MRF Ltd, Tata Yuasa to name a few. About 50% of co’s production is exported to numerous international customers.
Due to continuous growth in automobile industries, demand for lead for next 5 years will continue to be in momentum. On the numbers side as well, POCL has performed quite well during Q2FY19.
Looking ahead, POCL seeks to maintain balance sheet liquidity and implement plans to boost operational cash flow for long-term profitability. Cash generation and preservation remain a key focus.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.