After underperforming for around two and a half years, the broader markets have gained momentum as valuations turned attractive due to the coronavirus-led correction in March.
Global liquidity, measures taken by the government, better than expected June quarter earnings and the optimism surrounding COVID-19 vaccine have contributed to the rally across segments.
The Nifty Midcap index had gained 53 percent from its low of March 23 on a closing basis. The index, which had corrected more than 50 percent from its record high of 21,840 in January 2018, was showing signs of revival even earlier. The broader markets along with benchmark indices had picked up momentum in the last quarter of 2020 but COVID-19 put a break to the upward journey.
"After the rally from March 2020 lows, the Nifty at 21x P/E is now trading at a premium to its long-period average. Midcaps, on the other hand, has started performing over the last two months – post its underperformance over more than the two years," Motilal Oswal said in a report.
The Nifty midcap index was down only 2 percent year-to-date and up 53 percent from March lows, outperforming the Nifty50 that fell over 6 percent and gained 50 percent, respectively.
The broader markets will outperform the benchmarks in the coming months if the growth comes back on track, say experts.
"Small & midcaps which have been underperformers are now looking poised for outperformance if the growth outlook improves, and most likely it will lead to re-rating of the broader market," Morgan Stanley said in its note.
Motilal Oswal has listed five high-conviction midcap ideas with equal weightage (20 percent each) that will do well in the short to medium term.
One can buy this basket of these five stocks with a potential upside of 10-15 percent over a time frame of 1-3 months, the brokerage said.
"ICICI Securities is a play on increasing financialisation of savings and retail participation in equity markets. The ongoing challenges in the industry are driving incremental market share toward large, institution-backed brokers like ISEC. We expect revenue/PAT to grow at 14 percent/19 percent CAGR, over FY20-23E. Further, its business model is capital light with a dividend payout ratio of around 70 percent," said Motilal Oswal.
Laurus has shown strong improvement in performance, primarily led by a doubling of formulation sales, 30 percent growth each in API and CDMO segment supported with around 780bp margin expansion, the brokerage said.
"We remain positive on Laurus on the back of superior execution across revenue segments, resulting in expansion of return on equity (ROE) to 27 percent and sufficient levers to sustain the earnings momentum," said Motilal Oswal.
Tata Power's benefit from asset monetisation and better working capital management leading to a net debt reduction. "Further infusion of Rs 2,600 crore from promoters would aid debt reduction. The approval of a tariff hike at Mundra, possible benefits from the merger of CGPL & Tata Power Solar with TPWR and favourable InvIT valuations provide upsides," Motilal Oswal said.
Crompton's efforts to improve its leadership position in the fans segment and a good start in the new category of water heaters and air coolers despite the ongoing disruption is commendable, the brokerage said .
"With strong profitability and an asset-light business model, return ratios are healthy – RoE/RoCE of 30 percent/29 percent in FY20," said Motilal Oswal.
BEL is well-positioned to benefit from rising defence expenditure, supported by strong manufacturing and execution, relationship with defence and government agencies, strategic collaboration with foreign technology partners, in-house R&D capabilities and an increased focus on exports, Motilal Oswal said.
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