Mid, small-caps outperform benchmarks in FY21; these 12 stocks can give up to 56% return in FY22

By providing attractive valuations, the COVID-19 pandemic seems to have offered an opportunity to investors who have been eyeing the mid and small-cap space to place their bets at significantly low risk, say experts.

April 04, 2021 / 06:23 PM IST

Equities across the board gave strong gains in the financial year 2021 (FY21), with metals, IT and auto leading the way. While the equity barometers the Sensex rose 68 percent and the Nifty 71 percent in the year, mid and small-caps outperformed the benchmarks. The BSE midcap jumped 91 percent, while the smallcap index logged whopping 115 percent gains in FY21.

By providing attractive valuations, the COVID-19 pandemic seems to have offered an opportunity to investors eyeing this space to place their bets at significantly low risk.

Devarsh Vakil, Deputy Head-Retail Research, HDFC Securities, is of the view that the mid and small-caps will benefit from lower funding costs and a recovering economic cycle.

"Higher business growth prospects and better profitability has excited investors to hunt for opportunities in the mid and small-cap space," said Vakil.

Likhita Chepa, Senior Research Analyst, CapitalVia Global Research, expects the trajectory to remain upward and higher single-digit growth in FY22.

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"Mid and small-caps have the potential to outperform largecaps as their valuations seem comparatively reasonable, providing greater scope for the rally," said Chepa.

While the space looks attractive, a blind bet should be avoided and stock-selection will be the key to reaping gains.

"Stock selection will remain the key. Investors should try to find the stocks which are fundamentally well-placed and hold the potential to withstand the near-term headwinds," said Chepa.

Here are 12 stocks in the mid and small-cap space that analysts think can give healthy returns in FY22 :

Recommendations by Likhita Chepa, Senior Research Analyst, CapitalVia Global Research

Jubilant FoodWorks | LTP: Rs 2,920 | Target price: Rs 3,650 | Upside: 25%

After witnessing a significant correction, this stock has been forming higher lows for three consecutive weeks.

It has delivered good profit growth of 22.03 percent CAGR over the last five years.

The ROE has been above 20 percent in the last three years and sales growth has also been consistent.

Avenue Supermarts (DMart) | LTP: Rs 2,870 | Target price: Rs 3,450 | Upside: 20%

Avenue Supermarts is taking support at its 100-day exponential moving average (EMA) on its daily charts and indicating a reversal.

There has been a consistent increase in its operating profit. With its diverse product portfolio and a high number of outlets, this stock is placed well to benefit in the near-term with economic activities returning to normalcy.

Endurance Technologies | LTP: Rs 1,420 | Target price: Rs 1,830 | Upside: 29%

The stock has been consolidating for the last few trading sessions. Any upward breakout would add bullish momentum to the stock.

With a consistent increase in net profit and cash from operating activity, this stock looks a good bet for the next 12 to 15 months.

Mahanagar Gas (MGL) | LTP: Rs 1,174.15 | Target price: Rs 1,830 | Upside: 56%

With the resumption of economic activities, the demand for the utility sector is likely to go up in the upcoming quarters. MGL, being the natural gas supplier, is likely to be one of the beneficiaries.

The company is almost debt-free and has delivered good profit growth of 21.52 percent CAGR over the last five years.

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Siddharth Sedani, Vice President-Equity Advisory, Anand Rathi Shares and Stock Brokers

Central Depository Services (CDSL) | LTP: Rs 657 | Target price: Rs 760 | Upside: 16%

CDSL enjoys a strong market position as India’s largest securities depository. In terms of cumulative market share of active demat accounts, CDSL has witnessed solid growth in the market share from 40 percent in FY14 to 51 percent in FY20.

The company's revenue remains well-diversified with annual issuer charges comprising about 34 percent of FY20 revenues, followed by transaction charges (19 percent), online data charges (16 percent), IPO/corporate action charges (10 percent) and others (17 percent).

During Q3FY21, the number of new active beneficial owners accounts with CDSL increased by 28 lakh, taking the number of active beneficial to 2.89 crore. As of January 31, 2021, the company reported 3.04 crore accounts.

Within financial assets, the allocation towards equities has been rising as retail investors have usually been under-invested in the equities.

CDSL stands to benefit from growth in capital markets. Also, increasing thrust on digital account opening and online initiatives create further optimism.

Eris Life Sciences | LTP: Rs 604 | Target price: Rs 670 | Upside: 11%

With the management’s sharper focus on launches, widening reach to doctors and greater MR productivity, the analyst expects PAT to record a 12 percent CAGR over FY20-23.

Acquisitions and strong growth in key brands have been prime growth drivers. The company now plans to launch a wide range of products in the fastest-growing chronic segment to boost growth.

"We raise our FY21e/ FY22e/FY23e EPS 8.6 percent/6.3 percent/10.1 percent," the analyst said.

Amara Raja Batteries | LTP: Rs 854 | Target price: Rs 1,117 | Upside: 31%

The company’s four and two-wheeler batteries business grew 7 percent and 25 percent, respectively, in Q3FY21.

The situation is likely to ease and the full growth potential of the company will be seen in coming quarters.

The analyst expects strong growth across segments to 16.4 percent revenue growth for the company in FY22. Also, the company’s entry into tower management system augurs well for a new revenue stream for its telecom.

"We understand from the company that there has been no price increases till date and, hence, we expect margins in Q4 to contract. We expect a price increase in Q1FY22 to offset the cost escalation," the analyst said.

With expected strong volume growth and centralised grid manufacturing, margins may expand by nearly 100bps to 16.7 percent in FY22.

The analyst expects FY23e revenues to grow 12.6 percent YoY, with margins at 16.7 percent, in line with FY22.

United Spirits | LTP: Rs 556 | Target price: Rs 653 | Upside: 17%

Improvement in United Spirits’ Prestige & Above (P&A) category would be a key monitorable. It stabilised on-premises channel, interventions in its P&A range and its further lessening focus on the popular category would improve performance in this category.

Valuations at 22 times FY23 EBITDA and 35 times FY23e earnings are not demanding and below historical averages.

"In overall volumes, we expect a 12 percent CAGR over FY21-23, with a 14 percent CAGR in volumes of the P&A category, resulting in 18 percent (standalone) sales CAGR (a 6 percent sales CAGR expected over FY20-23)," said the analyst.

Devarsh Vakil, Deputy Head-Retail Research, HDFC securities

Birla Corporation | LTP: Rs 959.95 | Target price: Rs 1,371 | Upside: 43%

The company has finalised a plan to scale up its capacity to 25 MTPA by 2025 from its current capacity of 15.6 MTPA, which provides strong visibility of future growth.

Birla Corp has a strong presence on the retail front owing to its distribution network and focus on trade sales, which has a share in excess of 80 percent of total volume sales.

Further, the company has been pushing more of the premium cement via its trade channels and higher ad spends. This has led premium products to form nearly 50 percent of trade sales.

An increase in sale in blended cement implies higher absorption of fly ash, which reduces clinker consumption, and in turn, boosts profitability, the analyst said.

Fly-ash and captive coal consumption is estimated to lower down costs by about Rs 30/MT.

The company has undertaken an organisation-wide supply chain improvement exercise, which is expected to contribute about Rs 50/MT in cost reduction FY23E onwards.

Radico Khaitan | LTP: Rs 556.40 | Target price: Rs 668 | Upside: 20%

Exports have grown by 120 percent in Q3FY21 and by 82 percent in nine months of FY21. It has a presence across 30 states in the US and intends to further expand its footprint not only in the United States but Europe and travel retail markets.

Continued focus on new launches and brand extensions has been a key driver of Radico’s growth over the past few years and this trend is likely to continue in the future.

The management has guided that Radico will continue to expand its super-premium portfolio by the existing brand launches in the new markets as well as new launches.

During FY17-19, Radico enjoyed earnings upcycle, which moderated in FY20, especially with the slowdown in the economy.

With new launches, more focused premiumisation, deleveraging of the balance sheet and down trading of premium products in some categories, the company is expected to perform better than peers.

KNR Constructions | LTP: Rs 213.90 | Target price: Rs 281 | Upside: 31%

The bid pipeline is strong with KNR targeting three-four order wins worth about Rs 3,000-4,000 crore.

Three hybrid annuity model (HAM) projects are to be monetised and will be completed in the first half of FY21, with discussion for the monetisation of the fourth HAM underway.

Its margins are expected to sustain at over 18 percent, with about 42 percent of irrigation’s share in the order book.

Execution efficiency normalised to pre-COVID level during Q3FY21. The execution was driven by all five HAMs.

Execution of irrigation projects has not only contributed to KNR’s EBITDA margins but also stabilised it during the pandemic.

Max Financial Services | LTP: Rs 857.10 | Target price: Rs 1,000 | Upside: 17% 

A diversified product portfolio and strong distribution reach have made the company the fourth largest private life insurance player in India.

Given the strong brand, leadership and tailwinds on the back of financialisation of savings, the analyst is optimistic about the company's growth.

A strategic partnership with Axis Bank provides long-term distribution capability, ending uncertainty and market anxiety over the future of Max Life (MAXL) and Axis Bank’s distribution arrangement.

Over a long-term period, India’s highly underpenetrated life insurance space is attractively positioned to capture the huge growth opportunity.

Large private players are better placed to take advantage, given their ability to push protection business by leveraging strong brand and existing network. They have access to adequate capital and can invest in online platforms.

Also, the insurance industry’s inherent nature of long gestation period to break-even (nine-10 years) and need for bancassurance partnership provides very bleak visibility for a new entrant, which, in turn, is extremely positive for well-established larger bancassurance players.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Apr 1, 2021 01:56 pm
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