Searching for mid, small-caps after recent correction? Top 10 stocks that could net up to 47%

A weaker rupee, relentless selling by FIIs, low earnings growth along with the rise in the cost of capital are some other factors which are weighing on the small and midcap space.

The volatility is likely to continue and mid-smallcaps are likely to stay in this state for some more time thanks to excess valuations, rising cost of capital and global tensions, experts said.

Nilesh Shah, MD, Kotak AMC said the valuations remain a key concern for smallcaps. Most of the small and even microcap names were trading at valuations higher than largecaps. Based on the last year performance, amateur money chased these stocks which took the prices at levels away from fundamentals.

Going forward, we think momentum driven small, mini and microcap have still room to go down but some of the quality mid & smallcaps will start making a process of bottoming out in the next 60 days which might turn out to be attractive buys, he said.

Nitin Bhasin, Managing Director & Head of Research at Ambit Capital told Moneycontrol that whilst valuations of small caps and mid-caps have reduced, we also note sharp downward revisions to earnings in the small-cap and mid-cap space, keeping valuations punchy.

“Rather than focusing on stocks which have declined sharply and optically offering value or bargain, we advise investors to hunt for quality businesses which are investing for building competitive advantages for long-term growth irrespective of the near-term business environment,” he said.

In an interview to CNBC-TV18, Bharat Iyer, MD, JP Morgan said, "Cost of capital will remain a concern for the next 2-3 years as the RBI is likely to hike rates 2-3 times a year. Earnings growth will have to do all the heavy lifting; hence, investors should be cautious of multiples."

He feels that earnings are going to compound in the 2-3 years by over 15-20 percent. "And, there are companies which could see that kind of compounding in earnings and any correction in those could be used as a buying opportunity."

Here is the list of top 10 mid-smallcap stocks that could give percent return:-

Brokerage: CESC Research

RBL Bank: Buy | Target - Rs 650 | Return - 15%

Given the robust loan growth trajectory and well-maintained asset quality coupled with healthy margins and improving Cost-Income ratio we give the stock a Buy rating with a target price of Rs 650, assigning a P/ABV of 3.4X FY20E.

Cyient: Outperformer | Target - Rs 842 | Return - 13%

We are optimistic about company’s growth prospects and expect double-digit growth in core IT services business and 35 percent growth in DLM business in FY19E on the back of strong order backlog and healthy pipeline.

We expect revenue growth of 12.9/12.5 percent and EBITDA growth of 9.6/7.8 percent for FY19/20E, respectively.

EBITDA margin is expected to improve due to operational efficiency that would be offset by the planned investments in the new business accelerator program.

At CMP, the stock trades at 17.3x/15.9x of FY19/20E EPS. We assign a target P/E of 18.0X FY20E EPS with a revised target price of Rs 842 and maintain an Outperformer rating.

Reliance Home Finance: Buy | Target - Rs 91 | Return - 47%

Reliance Home Finance's loan book recorded robust growth of 33 percent YoY and stood at Rs 16,380 crore, largely driven by growth in affordable housing segment (35 percent YoY). In FY18 disbursements grew by 19 percent YoY to Rs 8,700 crore. The management expects its AUM to grow by 45 percent CAGR over FY19-21E.

Asset quality remained intact, with the reported gross non-performing assets at (same levels as FY17) a healthy 0.8 percent. Provision coverage ratio stood at 47 percent up from 26 percent in FY17. With focus on small ticket lending, and strict policy measures (w.r.t credit appraisal) in place, the management expects NPAs to remain at current levels.

Going forward the company expects to maintain cost/income ratio in the current levels, as majority of the new branches in around 75 locations will be low cost affordable branches.

We maintain a Buy rating and arrive at the target price of Rs 91, assigning a P/ABV of 1.9x FY20E.

Minda Industries: Buy | Target - Rs 1,461 | Return - 19%

Auto ancillary supplier Minda Industries has a robust capex plan of Rs 400 crore for FY19. Greenfields expansion for the lighting plant in Chennai will cater primarily to Renault. It will increase 60,000 additional alloy wheel capacity at their newly set-up Gujarat plant. The total alloy wheel capacity is 250,000 wheels.

The company is also evaluating opportunities in the electric vehicle space. It is in touch with OEMs for possible EV compatible systems.

We expect revenue to grow robustly going ahead led by higher contribution by core segments and incremental revenue from the new products. We rate the stock a Buy rating with a target price of Rs 1,461; valuing the company at a P/E of 27XFY20E EPS.

Zensar Technologies: Outperformer | Target - Rs 1,345 | Return - 8%

Zensar’s Digital business has been growing 35 percent YoY and now contributes 38.2 percent to overall revenue. While Digital business is growing significantly, legacy business has been under pressure, especially non-core IMS business (Hardware Infrastructure). However, we expect non-core business has bottomed out and should start seeing growth.

Zensar expects further improvement in the margin of the digital business as the business scales up. Currently, Digital business margins are at company average.

We expect Zensar’s revenue growth would surpass the industry growth in FY19-20E led by Digital business and Cloud Infrastructure business with significantly better earnings.

We maintain an Outperformer rating with a target price of Rs 1,345, based on P/E of 16.0x FY20 EPS.

Kajaria Ceramics: Buy | Target - Rs 706 | Return - 44%

There is a sharp improvement in the Pradhan Mantri Awas Yojana (PMY) program across all parameters, in the Q1FY19, 1.04 million houses were sanctioned, 0.99 million houses were under construction and 0.42 million houses were completed. Since introduction of PMAY, 5.1 million houses were sanctioned, 2.8 million houses were under construction and 0.76 million houses were completed.

We expect the demand for ceramic tiles to accelerate due to strong execution of PMAY and increase in launches in the affordable housing segment by real estate players.

Management expects 12-15 percent volume growth in FY19 and plans to increase the capacity by around 46 percent to 100 msm by 2021.

We expect the revenue and EPS to grow at a CAGR of 15.9 percent and 26 percent between FY18-20E. We are positive on the long term prospects of the company given its leadership position and execution capabilities, in addition to this, the favorable long term demand drivers such as low penetration, urbanization, favorable government policies and GST rate reduction are likely to spur demand.

Trident: Buy | Target - Rs 81 | Return - 47%

Trident operates in three key business segments such as home textile (49 percent of revenue), yarn (33 percent of revenue) and paper (18 percent of revenue) with manufacturing facilities located in Punjab and Madhya Pradesh.

As the company has completed all major capital expenditure, we estimate the cumulative free cash flow (FCF) generated between FY18-20E would be around Rs 2,180 crore i.e. around 78 percent of current market capitalization, which provides a good margin of safety.

Trident's has highest cumulative pre-tax CFO / EBITDA ratio amongst its peers, which indicates high quality of earnings and company’s ability to convert EBITDA into operating cash flow which is difficult to manipulate.

Amongst the comparable peers, Trident has relatively better earnings quality and trading at an inexpensive valuation i.e. 25 percent discount to its peers average. We maintain a Buy rating with a target price to Rs 81 valuing the company at 10X FY20E EPS, representing an upside potential of 47 percent.

Dewan Housing Finance: Buy | Target - Rs 743 | Return - 15%

With disbursements growing at 81.3 percent YoY, DHFL’s AUM reached Rs 1.11 lakh crore in FY18, up by 32.9 percent YoY.

Going forward, the management expects loan book to grow by 20-24 percent per annum, while disbursements would grow by 28-30 percent per annum till FY20E, predominantly driven by focus on affordable housing and SME segment.

Asset Quality continued to remain stable with GNPAs intact at 0.96 percent. The company has taken a prudent stand by providing Rs 420 crore, keeping the PCR at 110.6 percent. Despite higher provisioning (93 percent YoY growth), DHFL reported a strong PAT growth of 26 percent (excluding impact of gain on sale of stake in DPLI by DHFL in FY17).

The cost to income (C/I) ratio also improved to 23.06 percent down by 57bps from FY17. The management has guided for a further 50-60bps dip in C/I by FY19E, on account of operating efficiency setting in.

Brokerage: ICICI Securities

Ratnamani Metals and Tubes: Buy | Target - Rs 1,150 | Return - 26%

Ratnamani Metals and Tubes (RMTL) is a niche player with superior capabilities in the domestic industrial pipes domain.

RMTL manufactures a wide range of stainless steel (SS) and carbon steel (CS) pipes and tubes, finding application in the highly corrosive environment of end user industries like oil & gas refineries, power, water and chemicals.

RMTL has around 35-40 percent domestic market share of SS tubes/pipes for niche applications. Going forward, we remain positive on the company on the back of a capex revival in its key end user industries. RMTL, with its competitively placed capacity, is well poised to cater to upcoming demand.

We expect overall sales volumes to continue to witness healthy traction given strong orderbook execution. In the backdrop of healthy demand prospects, we expect topline, EBITDA, PAT to register a CAGR of 14.5 percent, 27.2 percent, 30.4 percent, respectively, in FY18-20E. We maintain our BUY recommendation on the stock with a target price of Rs 1,150.

Brokerage: Edelweiss Securities

Security & Intelligence Services India: Buy | Target - Rs 1,532 | Return - 39%

SIS reiterated its objective of becoming the leader across business segments, but cautioned that its M&A approach is extremely selective with only strategic-fits on the radar.

Furthermore, the operating strategy remains centered on improving the proprietary operational model. This is in line with our view that SIS has a best-in-class operational model in terms of efficiency.

SIS India’s Group Managing Director Rituraj Sinha said the FY18 growth momentum has continued into FY19E, which indicates that the current growth run-rate is healthy. We reiterate Buy with an unchanged target price of Rs 1,532.

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