Midcaps on road to revival, here are 8 stocks that may offer 15-34% returns

"Since the markets have corrected quite a bit, it is prudent to start investing in tranches or in a phased manner spread over the coming three or four months," he said.

Against the 8 percent gain in the benchmarks, the Nifty Midcap index has gained only 6.6 percent while smallcap index rose 6 percent. This underperformance has been witnessed since December 2017.

The Nifty Midcap 100 index is down by 22 percent since December 2017 with 70 constituents showing a massive 29 percent fall while the rest registered a 2 percent decline.

But the Nifty50 has delivered a 10 percent return since December 2017, driven by a group of top 15 Nifty stocks (66 percent of Nifty market capitalisation), which are up by 30 percent over this period while other 35 stocks fell by 15 percent.

Hence, the divergence between these two groups is at 45 percent, up sharply within six months from 33 percent in March 2019, Motilal Oswal said, adding the midcap index market cap is still 31 percent off from its December 2017 peak while Nifty50 market cap increased by 8.5 percent to Rs 84.5 lakh crore since December 2017.

Even the Midcap 100 index is still trading at a 9 percent discount to Nifty50.

"After reaching a peak of 42 percent in March 2018, the relative valuation premium of midcaps versus the Nifty has corrected sharply owing to the sharp underperformance of the Nifty-Midcap 100 versus the Nifty and the premium has turned into a discount," the brokerage said, adding on a price-to-book value basis, the Nifty Midcap 100 index (2x) traded at a 25 percent discount to the Nifty (2.6x).

Here are top eight midcap ideas which may offer 15-34 percent returns:

Brokerage: Motilal Oswal

Indian Hotels: Buy | Target: Rs 178 | Return: 15 percent

The Indian hospitality industry appears set to enter an upcycle led by favorable demand-supply dynamics. Currently, industry occupancy (67 percent) is near optimum levels, which, in turn, should provide strong pricing power to hotel players.

With the GST rate on room tariffs above Rs 7,500 now slashed to 18 percent from earlier 28 percent, demand in the upper upscale/luxury segments is likely to increase, benefiting Indian Hotels as well.

As part of its ‘Aspiration 2022’ strategy, company aims to reduce costs by 3-5pp and take the EBITDA margin to 27-28 percent. Additionally, company plans to change its owned and managed room mix to 50:50 from 30:70 now, which will reduce its capex requirement.

Federal Bank: Buy | Target: Rs 125 | Return: 34 percent

Total net stress loans (NNPA+ standard restructured+ net SRs) have declined to 2.3 percent of loans from 5.4 percent of loans in FY16. It has limited exposure to new standard stressed exposures, while maintaining a healthy coverage ratio at 67.4 percent (including TWO) will likely facilitate controlled credit costs.

CASA + retail term deposits constitute around 93 percent of total deposits. It has lower cost of funds compared to other mid-size banks. Thus, it will have lower impact on margins driven by the move to link all floating rate retail and MSME loans to the external benchmark.

We believe the recent corporate tax rate cut will improve the bank’s earnings for FY20/21 by around 17/15 percent as it falls in the higher tax bracket (around 34 percent) and carries lower DTA reversal.

PI Industries: Buy | Target: Rs 1,510 | Return: 18 percent

Custom Synthesis Management (CSM) business is set to capitalize on growing exports momentum due to firm requirements from innovators and environmental issues in China (reflected in the size of order book – $1.35 billion as of FY19, up 23 percent YoY). PI launched three molecules in FY19 and plans to launch another 3-4 this year, which will likely drive segmental revenue CAGR of 26 percent over FY19-21.

Domestic agro-chemical business is expected to deliver an 11 percent CAGR over FY19- 21, backed by 2-3 product launches in FY20 and scaling up of two products that were launched in FY19.

On a one-year forward P/E basis, PI has historically traded at a three-year average multiple of 28x. However, we value PI at 30x FY21 PE (around 7 percent premium to its 3-year average multiple), factoring in strong growth potential in its CSM biz and arrive at a target of Rs 1,510. Maintain buy.

Aditya Birla Fashion: Buy | Target: Rs 250 | Return: 20 percent

Pantaloons is expected to improve store productivity and margins with a higher focus on private labels and a higher mix (above 80 percent) of margin-accretive fashion products. We expect Pantaloons to add 55/65 stores in FY20/21, with the EBITDA margin expanding by 130bp to 8.5 percent over FY19-21.

Lifestyle business is aiming to expand in the women’s inner wear segment (with already significant presence in men’s inner wear – growing at 50-60 percent annually). This, coupled with cost efficiency drives in the brands business, is expected to improve the EBITDA margin by 110bp over FY19-21.

We maintain our buy rating on ABFRL with a target price of Rs 250.

JK Cement: Buy | Target: Rs 1,270 | Return: 22 percent

We like JK Cement's (JKCE) positioning in the key markets of north and central India – it derives around 70 percent of volumes from these regions. In our view, north and central will have more than 85 percent utilization levels over the next two years, supporting pricing and margins there. Moreover, JKCE is further increasing its exposure to these regions (expansion of 4.2mt or around 40 percent to 14.7mt).

The expansion would also help JKCE move down the cost curve (with around 80 percent of post expansion grey cement capacity being cost efficient) by reducing its power & fuel costs, thereby improving its competitiveness.

The company is also expanding and upgrading its old kiln at Nimbahera, which should drive power savings of 10-12 units per ton and fuel savings of 40-50 kcal, resulting in annual cost savings of Rs 60-70 crore (6 percent of EBITDA) from FY22.

We expect JKCE to deliver EBITDA CAGR of 24 percent over FY19-21 and RoE improvement from 11 percent to 14 percent.

Oberoi Realty: Buy | Target: Rs 650 | Return: 25 percent

Commencement of operations at Borivali (October 2020), Worli (October 2021) malls, and Commerz III (March 2021) is likely to drive good traction in the annuity portfolio. We expect annuity portfolio CAGR of 47 percent to Rs 1,440 crore over FY19-23.

Foray into affordable housing (AFH) via closure of the Thane land deal and the planned launch of Exquisite III (Goregaon) by Oct'19 are likely to boost residential sales volumes by 2x to 1.6msf in FY20 (v/s 0.8msf in FY19). Strong balance sheet position (net debt to equity of 0.1x in FY19) provides cushion for scalability amidst market consolidation.

We remain positive on Oberoi Realty due to its (a) strong balance sheet, (b) strong brand equity, which helps command premium pricing, (c) execution track record, (d) robust line-up of launches both in residential and annuity portfolio, (e) benefits from the ongoing consolidation in the industry and (f) foray into AFH with the land deal in Thane, where demand is strong in the segment for branded players. Maintain Buy with an SOTP-based target of Rs 650 per share.

Brokerage: BOB Capital Markets

Greenply Industries (Target price: Rs 200, Buy) and Cera Sanitaryware (Target price: Rs 3,135, Buy) are preferred picks in the midcap space despite the tepid near-term demand environment, due to their strong balance sheets and reasonable valuations.

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