Small and midcap stocks have rallied over 40 percent each since March lows with many stocks registering triple-digit gains during the five months. A large part of the rally was seen in the smallcap space while the largecaps have relatively underperformed.
It looks like the liquidity is chasing growth, and many companies in the small & midcaps space are likely to benefit the most as the economy opens up, and demand starts to pick up after months of lockdown.
“Midcap and smallcaps seem to be getting their mojo back as they are starting to outperform largecap peers. Renewed investors’ confidence and attractive fundamentals are key factors for investor’s preference in midcap & smallcap,” Sacchitanand Uttekar – DVP – Technical (Equity), Tradebulls Securities told Moneycontrol.
In terms of valuation, midcaps stock are trading at attractive levels when compared to the largecaps after two years of underperformance since 2018.
“After the rally from March 20 lows, the Nifty at 21x P/E is now trading at a premium to its long-period average,” brokerage house Motilal Oswal said in a report.
“Midcaps, on the other hand, has started performing over the last two months – post its underperformance over more than the two years. In fact, Nifty Midcap 100 is down just 2 percent YTD vs Nifty which is down 6 percent,” the report said.
Foreign brokerage firm Morgan Stanley in a note said that growth is set to turn, and smaller firms are likely to benefit more due to their operating and financial leverage.
Valuations of small & midcap stocks are looking attractive relative to GDP and money supply, setting the stage for outperformance versus largecap stocks in the coming months.
The global investment bank is of the view that small & midcap stocks could be up for a re-rating if the growth outlook improves.
In the small & midcap space, Morgan Stanley bets on these stocks which have a market cap of more than $3.5 billion, it includes Aditya Birla Capital, Bharat Electronics, CG Consumer, Just Dial, PNB Housing Finance, Narayan Hrudyalaya, and Tata Power among others.
Here is a list of top 10 stocks from brokerage houses from the small & midcap space:
Brokerage firm: Motilal Oswal
The stock 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%/19% CAGR, over FY20-23E. Further, its business model is capital-light with a dividend payout ratio of 70 percent.
Laurus has shown strong improvement in performance primarily led by a doubling of formulation sales, 30 percent growth in each API, and CDMO segment supported with 780bp margin expansion.
We remain positive on Laurus on the back of superior execution across revenue segments, resulting in expansion of ROE to 27 percent and sufficient levers to sustain the earnings momentum.
Tata Power benefits from asset monetisation and better working capital management leading to net debt reduction. Further, infusion of Rs 26 billion 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.
Crompton’s efforts to improve its leadership position in the Fans segment and good start in the new category of Water heaters and Air coolers, despite the ongoing disruption, is commendable.
With strong profitability and an asset-light business model, return ratios are healthy – RoE/RoCE of 30%/29% in FY20
BEL is well-positioned to benefit from rising defense expenditure, supported by (a) strong manufacturing & execution, (b) relationship with defense and government agencies, (c) strategic collaboration with foreign technology partners, (d) in-house R&D capabilities, and (e) an increased focus on exports.
Brokerage: Dolat Capital ACC:
ACC, a pan India player, with 33.4mtpa capacity accounts for about 6.5 percent of India’s capacity. ACC has 17 (11 integrated + six grinding units) cement plants spread across the East (8.6mtpa – 26%), West (3.8mtpa – 11%), North (5.9mtpa – 18%), South (9.9mtpa – 30%), and Central (5.2mtpa – 16%) regions.
ACC’s healthy cash flow & RoE, net cash position, and 5.9mtpa (17.7% increase) capacity expansion, current valuation of 9.6x/ 8x CY20E/ CY21E EV/EBITDA provides comfort which is 13%/ 35%/ 42%/ 43% discount to 1yr Fwd EV/EBITDA of 1/ 3/ 5/ 10 years.
Gujarat Gas would utilise its incumbency advantage by riding the volume growth potential of the key industrial belts of Gujarat. Gas economics as a fuel across all segments would provide long-term demand sustainability.
Gujarat Gas business model is highly skewed towards the industrial segment and hence both volumes and margins remain highly volatile. With the availability of gas in spot RLNG market, the gas supplies would remain smooth.
Amongst the best placed to capture the growing clean energy demand for the biggest cities, IGL has been our structural pick in the sector.
With city gas ranked as number one priority by the government and rising environmental concerns in Delhi and surrounding areas, the push for a green fuel economy by the government and favorable gas economics leads us to believe that IGL will likely sustain its long-term growth trajectory with healthy margins and stable spreads
The volume growth outlook for the near-term looks weak as the demand lost due to lockdown is a permanent loss of demand and recovery will take a few months to return to pre-COVID levels.
We remain positive on IHCL led by its strong brand recall and footprint across segments, asset-light approach, monetisation of non-core assets, focus on driving alternate revenue streams, repositioning Ginger in the lean luxury segment, and efficient costs management.
Historically, IHCL has traded at ~20x 1-year forward EV/EBITDA. We increase our target multiple from 15x to 20x on account of broader market re-rating, healthy cost savings initiative, and monetization of non-core assets to potentially keep debt flat YoY in FY21.
Relaxo is our preferred play on the mass footwear category with brands like Bahamas’ and Flight. In addition, Sparx has enhanced its reach to sports and casual category. The key swing for us to favor Relaxo over Bata is its distribution led model versus retail model of Bata.
This has helped it to defend operating margins in tough times. We believe that the asset-light model and strong brand recognition would help it to recover fast compared to other players in the industry.
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