The euphoric rise seen in the midcap stocks not just in the year 2017 but for the last 4 years left many investors puzzled about the future prospects of companies in that segment.
Looking at the valuations which are now at a decade high compared to largecaps, many started calling midcaps as ‘Madcaps’. But, going by experts tracking the space, the rally may not be over yet and we could see high stocks trading at premium valuations for some more time.
The S&P BSE Midcap index rose 47 percent so far in 2017 compared to 27 percent rally in the S&P BSE Sensex.
The S&P BSE Midcap Index’s trailing price to earnings (P/E) ratio — a widely watched valuation measure — on Thursday’s close stood at 46.66 times while the S&P BSE Sensex was trading at a P/E of 24.95 times. The gap was 21 times.
Midcap stocks outperformed largecaps for the fourth year in a row largely on the back of huge unlocking which happened after the government implemented various pro-growth policies.
“The midcap stocks have performed very well as against largecap stocks not just in the year 2017 but over the last 4 years. A rough estimate indicates that more than 60 percent of the stocks in the S&P Midcap index outperformed Sensex returns so far in the year 2017 despite concerns of stretched valuations amid growth concerns,” D.K. Aggarwal, Chairman and Managing Director, SMC Investments, and Advisors told Moneycontrol.
“Going forward, it is expected that even in the year 2018; the midcap stocks will continue to outperform as these stocks are largely domestically focused and on continuous inflow support from the domestic institutions,” he said.
Valuations for many stocks have seen a sharp increase which some might call alarming but as growth bounce back which most experts see happening in the year 2018, the multiple which looks stretched now will contract.
Some of the stocks are richly valued at present, but there are still some companies that are on strong fundamentals and are available at a reasonable valuation, suggest experts. The stock selection should be made keeping Budget in mind which could bring a lot of good news to companies in the midcap space.
“We believe the budget can be a trigger but given current valuations handpicking select stocks from sectors that are already performing well on the back of reforms that are in place and revival in demand is our overall strategy,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.
“Midcap space has outperformed in terms of returns with stocks giving the return as much as above 200 percent return post recent reforms that been unleashed by the GOI. Recent developments of BharatMala projects and banking recapitalization have also unearthed some gems that may outperform overall broader indices in coming years,” he said.
Post GST implementation, analyst saw a revival in demand and supply which is also reflecting in prices of some of the midcap stocks. A few sectors that are looking attractive at present is Construction, Infrastructure, and reality.
“Construction and Infrastructure has recently seen a boost post unearthing of Bharat Mata projects while Realty has been enjoying the bullish wave post previous budget with RERA in place that is a win-win for producers and ends consumers. With PMAY in action, we believe this sector can work well keeping the theme in perspective,” said Nadeem.
Here is a list of stocks handpicked by experts from the midcap space which could turn out to be serious wealth creators in the next 2-3 years:
Analyst: D.K. Aggarwal, Chairman and Managing Director, SMC Investments, and Advisors
The strong order backlog, combined with proven execution capabilities and low-geared balance sheet, would help the company to deliver healthy growth in the foreseeable future.
The government’s increasing focus on the construction industry is expected to generate better order flows going forward. The Management is planning to reduce its debt and expects the Company to be debt-free in the coming years. This improving balance sheet position is expected to increase profitability levels, going forward.
The company has positioned itself as a comprehensive solutions provider. As per management of the company it has the capability to create opportunities to cross-sell its R&D engineering services to its clients and also supplement its IT services capabilities.
The Company’s overall strategy of achieving industry-leading growth through deep domain expertise in chosen verticals combined with technical depth, customized for clients remain the same.
An enviable client list and a fantastic leadership team are two clear advantage areas for Mindtree and plan to leverage them to engineer meaningful technology solutions to help businesses and societies flourish.
Monte Carlo Fashions
The Company holds a very good standing among the buyers regarding its winter wear collection. The brand has been launching various collections from time to time to keep its customers ahead in the fashion lane and enjoys an enviable position among all apparel brands in the country.
The management is planning to expand the product range to be recognised as an all-season apparel brand and increase footprint across the country.
Techno Electric & Engineering
Techno Electric & Engineering Company is a provider of engineering, procurement, and construction (EPC) services to core sector industries in India. The management of the company is confident of the company’s potential to expand the EPC segment on the back of capex revival, led by PGCIL and SEBs, with strong visibility of traction in the order book.
In FY18, the management has said that it would focus on the closure of projects, which it believes will prune retention money and improve working capital cycle.
The company’s growth plans entail an investment of Rs 5,000 crore over the next 10 years. It is planning to double its turnover in the next three years, betting big on exports and localising products in markets like the US and Europe.
Company’s performance in the international markets contributed significantly to the top line and ensured overall growth. The company was able to maintain sales and the growth in volume had enhanced profitability.
Analyst: Mustafa Nadeem, CEO, Epic Research
NCC is one of the stock that has been advised by us to our clients a few weeks back and we continue to be overweight in the sector as well as stocks since prospects look bright for next 2 - years. We expect over 25 percent appreciation from present levels.
This stock is looking attractive since there is an overall theme at play and we prefer this in Infrastructure space with a time horizon of 2 -3 years.
We have recommended this stock earlier as well and remain bullish for next 2- 3 years till 2020 keeping reforms and implementations of policies that will have a huge benefit for this stock. With REIT coming into action DLF may be the biggest beneficiary given its presence across India.
This stock is continuously outperforming the fact that chemical space may continue to do well. The margins have improved drastically with an increase in top line and improved bottom line.
From two digit to three digits and at present levels as well we expect it to appreciate 20 percent and outperform overall space for FY19.
Brokerage Firm: Prabhudas Lilladher
Capital First (CAFL):
CAFL continues to grow non-LAP and in new product segments like used cars & salaried personal loans. Overall asset under management (AUM) growth improved to 28 percent on a YoY basis with retail growing over 33 percent YoY.
We expect risk-adjusted margin to further move up as mix changes towards higher IRR based lending as it continues to scale up and we believe it is on track to achieve 16 percent return on equity (ROE) in FY19 & 17.5 percent in FY20E on back of PAT CAGR of 34 percent over FY17-FY20E.Disclaimer
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