Historically speaking, the midcap and smallcap indices have never given negative returns for two consecutive years, and they have had a dismal 2018.
It is time to take note of small and midcap stocks, as most experts say the valuations are looking attractive and the froth in the broader markets seems to have dissipated.
The BSE Smallcap index is down by more than 22 percent, while the BSE Midcap index is down 16 percent from their record highs in 2019, compared to 7 percent fall seen in the Sensex. A similar fall was seen in Nifty Midcap and Smallcap index.
Investors with a long term horizon could now look at the small and midcap stocks selectively which are showing growth trends and have strong fundamentals.
The silver lining for investors is reasonable valuations, especially for small and midcaps, and a reasonable base for H2 earnings, say experts.
“Since the peak of Jan-18, NSE Midcap index has corrected around 25 percent whereas the Smallcap index has corrected around 40 percent. The Nifty, on the other hand, is up 6 percent for the same period,” Viraj Kulkarni, Senior Manager, Fund Management – Equity, IDFC AMC, said.
“The NSE Smallcap index trades at 15.0x on positive PE basis; the Nifty trades at 21.0x positive PE. The gap between the Nifty and Smallcap returns from Jan-18 is around 46 percent, which can give an attractive entry point for long-term investors, notwithstanding the short term headwinds.”Note: Top 20 stocks in the S&P BSE Midcap index which have fallen 30-80 percent in 2019. The chart is for reference and not buy or sell ideas.
The midcap and smallcap indices have never given a negative return for two years in a row, and they have had a dismal 2018.
“Anecdotal evidence suggests that the broader market has never given a negative return for two consecutive years. We can expect good returns in the mid-cap and small-cap sectors in the next three-six months. In fact, we have started seeing some signs of accumulation in this space in the last one-two weeks,” Amit Gupta, co-founder and CEO TradingBells, told Moneycontrol.
Vinod Nair, Head Of Research at Geojit Financial Services, said he was advising their clients to make a room for mid smallcaps in their portfolio.
Affle (India) Ltd will benefit from the increasingly mobile consumer base in the country as it looks to grow its marketing platform, which delivers relevant consumer engagement, acquisitions and transactions.
United Spirits Ltd have reduced its debt which will add to profitability.
Analyst: Ajit Mishra, Vice President Research, Religare Broking
For long-term investment, there are quite a few good small and midcap stocks available at attractive valuations. We like Whirlpool, Elgi Equipments, Godrej Consumer Products, Akzo Nobel, IGL, KEC International and Minda Corp.
All these companies have sound fundamentals and strong long-term growth prospects. These companies can be bought in a staggered manner at CMP and on dips of 8-10 percent from current levels for healthy returns over the next two-three years.
Brokerage Firm: Kotak Securities
Century Plyboards is a leading player in the plywood and laminate segment. To cater to varied customer preferences, it has widened its product portfolio with multiple products at various price points.
Century Ply has expanded its laminate capacity and entered into MDF and particle board. It has guided for seven-eight percent full-year volume growth in the plywood segment in FY20. The management expects 15-20 percent revenue growth in other businesses in FY20.
At the standalone level, EBITDA margin was unchanged at 16.1% but the margin saw a significant improvement compared with the last three quarters. We value the stock at a PE of 18x on FY21E EPS.Orient Cement
The margins stood at a multi-year high in the June quarter but volumes hit a demand slowdown. The company reported revenues of Rs 6,900 crore. Volumes declined by 6 percent year-on-year (YoY) in an industry-wide phenomenon due to elections, liquidity tightness and sharp price hikes.
Positive demand in the south was more than offset by a weak west for Orient. The product mix has kept shifting towards OPC due to higher sales to projects and non-trade segment.
With no growth capex, net debt would reduce to Rs 10.7 bn (-15% YoY) and net debt/EBITDA would reduce to 2.2X in FY20E from 4X in FY19.
The brokerage firm increases EPS by 5-1 percent in FY20- 21E and fair value to Rs 112 (from Rs 106) at 6X EV/EBITDA FY21E.
PLNG set up India's first LNG receiving and regasification terminal at Dahej and another at Kochi. It is promoted by GAIL (India) Limited, Oil & Natural Gas Corporation Limited, Indian Oil Corporation Limited, and Bharat Petroleum Corporation Limited. They hold 12.5 percent stake each.
The brokerage firm reduced its EPS estimates to Rs. 16.8 (-5%) in FY20 and Rs. 19 (-4%) in FY21 updating our model for (1) non-cash adjustments pertaining to the accounting of operating lease under Ind-AS 116, (2) details in FY19 AR and (3) other minor changes.
PNC Infratech Ltd (PNC) is into construction and infrastructure development, with expertise in highways, bridges, flyovers, airport runways, development of industrial areas, etc.
PNC has maintained guidance of over 45-50 percent YoY growth in FY20E, with EBITDA margins of 13.5-14 percent based on strong order book and execution timeline.
The EPC business (adjusted for Rs 41 per-share value of BOT) is available at a PE of 11.3x and 7.9x based on FY20E and FY21E EPS of Rs 12.2 and Rs 17.5 per share, respectively.
Analyst: Vinod Nair, Head Of Research, Geojit Financial Services.
MTEP is one of the leading suppliers of high-quality packaging for paints, lubricants, food and FMCG. Its revenue grew by 13 percent CAGR whereas PAT grew by strong 27 percent CAGR over FY13-FY19.
Going forward, incremental volumes owing to capacity expansion, higher contribution from in-mold sales and rising share of FMCG will be accretive for the company.
We are positive on MTEP as tangible benefits from the shift towards IML technology is yet to be realised, providing strong earnings outlook of 20 percent CAGR over FY19-21E, we have a buy rating.Avanti Feeds Ltd
A leading manufacturer of shrimp feeds and a major shrimp processor, Avanti Feeds Ltd has a strong track record of growing above industry growth in last five years.
Post the unusual above-normal growth in FY18, the industry faced headwinds with correction in shrimp-export prices on account of demand-supply mismatch in the US and the slowdown in domestic shrimp-production.
Sales growth was flat in FY19 compared to 30 percent seen on a YoY basis in FY18 and margin halved to 11 percent. But, the industry cycle is likely to improve in the coming year, both the farm-gate and shrimp prices started to improve marginally in the recent quarters.
We expect revenue/PAT to grow at 14%/19% CAGR over FY19-21E. Considering healthy growth & RoE and no debt, we recommend a buy rating on the stock.
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