Even though the midcaps have underperformed the largecaps in 2019, the government's infra push will boost the earnings of companies involved in the sector
After a slew of announcements in the Budget that will push the sluggish economic growth, midcap stocks have again come into the spotlight.
Even though the segment has underperformed the largecaps in 2019, the government's infra push will boost the earnings of companies involved in the sector, say experts.
Hence, they suggest given attractive valuations, some quality names can be picked from the space, however, investors should beware of the value traps as few companies have witnessed serious corporate governance issue coupled with weak fundamentals.
“Investors should also do their due diligence with a focus on the financial strength and future outlook of business irrespective short-term volatility. The investors have opportunity to capitalise on stocks linked with the domestic economy theme like Dilip Buildcon and Dabur India, which are likely to do well in coming years,” Dinesh Rohira, CEO & Founder 5nance.com told Moneycontrol.
“The ambitious budget allocation of Rs 20 lakh crore annually for infrastructure, upgradation of roads, and a strong focus of government on connectivity are likely to favour Dilip Buildcon given its robust execution capabilities that translate to 10-15 percent growth annually,” he said.
We have collated a list of 15 stocks handpicked by experts in the midcap space with an investment horizon of more than a year:
Analyst: Sanjeev Zarbade, VP- PCG Research, Kotak Securities
The FM has raised import duty on Indoor units of split ACs, which will drive OEM brands to shift procurement to Indian contract manufacturers like Amber Enterprises.
Plus, delayed onset of monsoon is a positive for the room AC industry and, again AEL being the prime contract manufacturer should be a key beneficiary. We have a target price of Rs 976 on the company.
Aegis is a leading liquid terminal operator with six terminals strategically located across India with a total capacity of 689,000 KL.
With the improvement in utilisation at its new and existing terminals, we estimate the return ratios of the company to improve going forward. We continue to have a BUY rating on Aegis with a target of Rs 270 at 25x FY21 earnings.
Kajaria Ceramics is the largest manufacturer of ceramic/vitrified tiles in India and the ninth largest in the world. After the NGT ban on the use of coal gasifiers, unorganised players are witnessing increased power and fuel cost due to shift towards gas and hence the price differential between organised and unorganised players is reducing.
Along with this, with improved compliance towards e-way bill implementation post elections, organised players like Kajaria Ceramics are likely to benefit with market-leading position and a wide offering of products. Our target price is Rs 653.
Analyst: Vineeta Sharma, Head of Research, Narnolia Financial Advisors
Government has proposed setting up 1.95 crore houses under Pradhan Mantri Awas Yojna (Rural) and offers an additional tax deduction of Rs 1.50 lakh on interest paid on home loans taken up to March 2020.
LIC Housing is well placed to cash the opportunity. It is trading at 1.3x on FY21 book value that is lower than its 10-year average.
The growth of insurance and its penetration is one of the top agenda of the government. SBI Life is best placed to capitalise on India’s low insurance penetration.
The company is increasing its market share to ~20 percent led by a strong distribution franchise. SBI Life has a big advantage due to its tie-up with SBI, which has a network of ~22,000 branches.
Analyst: Karvy Stock Broking
Penetration of radial tyres in the truck and bus segment is about 40-45 percent and this is expected to increase to 70-75 percent in the next two years. Apollo having a notable share in the T&B segment is expected to benefit from this.
We value Apollo Tyres at a P/E of 13x for FY21E EPS of Rs 19.6 for a target price of Rs 254. However, the downside risk to our call arises from the prevailing low demand condition in India and Europe. Also, increasing the share of imports from Thailand could be a concern. Still, we believe that demand revival for both domestic and exports is on the horizon and expect capacity expansion plans to start yielding by FY20E-21E.
Domestic formulations will witness healthy mid-double-digit revenue growth in FY20E. Despite challenges in anti-malaria segment company will continue to outperform in pain, derma and urology segment in the domestic market.
Company has guided 12-14 percent growth for FY20E on the back of healthy growth in the pain, cardiac, and anti-bacterial segments which will boost the gross margins. Karvy has a buy rating and a price target of Rs 1,090 based on 18.6x FY21E.
The company has an expansion plan worth 7,500 TPD (tons per day) clinker production line and split grinding unit at Aligarh and Balasinor is going on in full swing. The company has obtained environmental clearance for Balasinor unit in March 2019 and 1 Mn TPA (ton per annum) cement grinding capacity each at Nimbahera & Mangrol is likely to be commissioned by June/July 2019.
The total amount of capex spent was approx Rs 557 crore till March 31, 2019 and for FY20E the amount of capex expected to be spent is approx Rs 1200 crore.
Karvy has a “BUY” rating, valuing at 10.25x EV/EBITDA (five years average forward multiple) on FY21E EBITDA for the target price of Rs 1,173.
The management expects the T&D business to perform well with a major contribution from international T&D projects from countries like SAARC, Africa and Brazil. Management maintains guidance of 15-20 percent growth in FY20E.
Karvy expects the existing strong order book to boost revenues at 14 percent CAGR during FY19-21E. The non T&D business segments are also expected to post good numbers and are expected to grow at 21 percent CAGR during FY19-21E. Karvy values KEC on 14x to FY21 EPS for a target price of Rs 364 reiterating our “BUY” rating.
The demand continues to be strong in the staple rice status of basmati in the Middle East region. Karvy believes that KRBL with great brand recall and dominant presence is well-positioned to capitalise on the opportunity.
Besides, an increasing trend in basmati consumption in domestic market augurs well for the company. The brokerage firm values the stock at PE 15.9x of FY21E EPS, which gives the target of Rs 403.
Karvy believes that the company’s sales will grow at CAGR of 10 percent, EBITDA at 9 percent and PAT at 8 percent over FY19-21E in view of about 7.5-8 percent growth in the steel industry.
Karvy values the stock on five years average PE 10.3x of FY21E EPS that gives a target of Rs 223. However, key risks to valuation could be a slowdown in the domestic economy and lingering of a global trade war.
Karvy believes that NIIT Tech’s strong growth momentum will continue in the future given its strong deal momentum and order book. As of Q4FY19, its order book stands at $390 million executable over the period of next 12 months with $170 million as fresh order intake during Q4FY19. Revenues were up by 22 percent in Q4FY19 to Rs 972 crore.
The brokerage firm recommends a buy rating to NIIT Tech with a target price of Rs 1,650 based on 3-year historical average P/E of 17x to its FY21E EPS of Rs 98.3.
Karvy expects Sobha to be a major beneficiary of post RERA scenario that has resulted in consolidation in the real estate industry wherein reputed players backed by execution track record stand to gain market share from unorganized players. It has put out a target of Rs 632.
Subros is India’s largest Car AC manufacturing Company. The company has an attractive business model wherein its product technology partner (Denso) and major customer (Maruti) are its shareholders.
Subros enjoys a 42 percent market share in the Indian Car AC market and remains to be a default beneficiary of growing 4W demand in India.
The brokerage firm expects Subros to report 12.3 percent sales CAGR and 35.6 percent PAT CAGR over FY19-21E. Karvy has a buy rating on the stock with a revised target price of Rs 336.
The domestic enquiry pipeline grew 8 percent to 1GW and the market for under 30 MW steam turbine is estimated at 740 MW in the domestic market in which Triveni holds 60 percent market share. Domestic order inflows were higher by 7 percent YoY to Rs 4.4 billion led by sectors
Karvy expects the earnings for Triveni to grow at CAGR of 26 percent to Rs 4.8, RoCE to average over 25 percent and cumulative FCF of Rs 1.67 billion during FY19-21E. It has a buy rating on Triveni by valuing it at 27.5x FY21E earnings (3-year fwd earnings average) for a target of Rs 134.Disclaimer: The views and investment tips expressed by investment experts and brokerages on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.