Small and midcap stocks may be least favoured by analysts at a time when most companies except FMCG and pharma are struggling to keep the business going amid falling demand.
With the fall on D-Street, most quality largecap names have fallen and are trading at multi-year lows, hence investors should consider largecaps over mid or smallcaps, say experts.
But, not all midcaps are a bad investment. Companies with quality management and a unique product profile can still be consider investing into, say experts.
“Not all midcaps and smallcaps are equally vulnerable. There are good niche businesses occupied by the mid and smallcap categories, and these would be less affected by the slowdown. What matters is the type of business we choose to invest in,” EA Sundaram, Executive Director & CIO- Equities- o3 Capital told Moneycontrol.
In a slowdown, it is an ideal strategy for investors to stay put with mega or large-cap stocks to ride out the storm. The valuation gap between large and mid-caps has narrowed, which also makes a case for investment in largecaps.
“In a slowdown, it is ideal to stay put with mega/large-cap stocks. The valuation gap between large caps and mid-caps has narrowed which makes a case to be with large caps,” Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities told Moneycontrol.
Historically, small and midcaps stocks have done well when the economy starts to pick pace but with the current environment in which the GDP could well head towards near zero or less than 1 percent, investing in midcaps could be tricky.
But, investors can have a look at industry leaders, which would be a better bet, experts say.
“Slowing consumption demand would be a chronic headache for most economies. Even India is likely to grow only 0-1 percent in FY21. We need concrete steps from India Inc. to ensure survival ahead of sustainability,” said Amar Ambani, Senior President and Head of Research–Institutional Equities, YES Securities.
“In general, yes. The credit availability invariably dries up faster for the long tail. But at the same time, there are certain midcap leaders in their respective sub-sectors armed with healthy balance sheets,” he said.
Here is a list of 10 stocks collated from different brokerages for an investment period of 12 months. Experts say most of these companies are likely to see an earnings’ cut in the near-term but will recover once the lockdown ends.
Brokerage firm: IDBI Capital
VIP Industries: Buy
IDBI Capital expects the luggage sector sales to remain very weak in H1FY21 due to impact of COVID-19 on travel and tourism. With anticipated weakness in FY21, the luggage sector will have two consecutive weak years.
“Nevertheless, post-COVID-19, organised luggage companies will emerge stronger than smaller players who are struggling with issues such as high working capital, debt, etc.,” said the note.
The domestic brokerage firm values the stock at a PER of 25x FY22E EPS and maintains a target price of Rs 345 with a “buy” rating.
APL Apollo: Buy
IDBI Capital expects APL Apollo’s volumes to fall sharply in H1FY21 due to the impact of lockdown and anticipates a slowdown in infrastructure and construction in H1FY21.
In the near-term, the company’s receivables and inventories may rise. The broad economic weakness is likely to weaken demand for ERW pipes in the near-term.
Moreover, a sharp fall in steel prices is likely to impact its profitability in Q1FY21 due to inventory losses (as witnessed in Q2FY20).
The brokerage firm slashed its FY21 sales/EBTIDA forecasts by 19%/25% due to lower volumes and weakening profitability. It also lowered its FY22 sales/EBTIDA estimates by 11%/13%.
Astral Poly: Buy
The plastic pipes industry would see near-term challenges from supply chain disruption and weak demand due to slowdown in the real estate and infrastructure industry.
IDBI Capital anticipates that the company’s production may start by mid-May, which still wipes out half sales of Q1FY21E. It has cut the net sales/EBITDA/PAT estimates by -16%/-12%/-20% and -43%/-60%/-74% for FY20E/FY21E respectively.
But, Astral is well placed to sail through the current turmoil and would be agile to bounce back once operations stabilise. The company’s extensive distribution reach, focus on branding, innovative products offerings and increasing sales of adhesives bode well for earnings growth.
With the recent fall in share price, in line with the overall market fall, the stock is currently trading at 31.7x PE on FY22E.
COVID-19 will have a cascading effect on all main sectors, including pipes, due to supply chain disruption and weak demand in the real estate and infrastructure industry. Major players have shut down plants since March 15.
IDBI Capital expects the production to restart only after the lockdown is over and the necessary measures implemented by the companies. Credit crunch at dealers’ end further weighs on concerns of the ailing sector.
The brokerage firm said that it likes FIL’s extensive distribution network, healthy market share in pipes segment and backward integrated operations for resin manufacturing.
Brokerage Firm: ICICIDirect
Aditya Birla Fashion and Retail (ADIFAS): Buy
Aditya Birla Fashion & Retail (ABFRL) combines Madura’s portfolio of leading lifestyle brands (Allen Solly, Van Heusen, Louis Philippe and Peter England) with Pantaloons’ strength as the largest value fashion retailer.
Over the years, Pantaloons has witnessed a significant upgrading of margin profile, from ~4% in FY15 to 10.1% in Q3FY20 (9.0% in YTD FY20). Owing to the discretionary nature of its product portfolio, in both lifestyle brands and Pantaloons, ICICIdirect expects revenue growth to take a hit in the short-term due to the coronavirus outbreak.
The brokerage firm is of the view that with its strong brand patronage and large distribution reach, the company will be able to revive revenue growth after normalisation of the scenario and improvement in retail footfalls. The stock currently trades at 1.2x FY22E EV/sales.
Apollo Hospitals owns one of the best-integrated business models in the healthcare space, with a strong management pedigree. Rapid expansion and maturity of older hospitals have kept the overall growth tempo at 12-14 percent per annum.
ICICIDirect expects the pharmacy business to grow at ~17 percent CAGR in FY19- 22E to Rs 6,153 crore, mainly on the back of new addition and improvement in realisation owing to ramp up in private label contribution.
Despite the likely disturbances in operations due to COVID-19 for a good part of FY21, the overall narrative is panning out along expected lines with sustained margin expansion and improvement in RoCE. The management has reiterated the roadmap for more focus on the consolidation of the existing hospitals and making new hospitals profitable. Exide Industries: Buy
Exide Industries (EIL) is a part of the duopoly in the organised Indian automotive battery space. For EIL, aftermarket, or the replacement segment, forms 60 percent of channel mix with OEM sales and exports constituting the rest.
Healthy new vehicle sales over FY17-18 and short approximately three-year replacement cycles lend strength to the aftermarket channel, providing steady-state demand in FY20-22E even though the OEM channel will remain largely subdued.
EIL is proactive on the lithium-ion front, having formed a JV with Swiss player Leclanche for assembly and eventual manufacture of battery cells. EIL clocks decent 13-14% margins with average RoCE at ~15 percent.
Gujarat Gas: Buy
Gujarat Gas is one of the largest CGD players in India, which operates mainly in Gujarat, Dadra & Nagar Haveli, and parts of Thane. ICICIdirect expects the industrial PNG segment to continue to report strong volumes.
In the CNG segment, the company has a network of more than 375 stations and has a CNG sales volume of 1.4 mmscmd. Although ICICIdirect expects the sales volumes to drop ~24 percent in Q1FY21E due to reduced demand, it expect sales to pick up once normalcy is restored.
The brokerage expects the total sales volume to grow at 11% CAGR in the next two years to 11.2 mmscmd in FY22E. The company is also a beneficiary of lower gas prices, which has helped it to maintain healthy gross margins. Havells India: Buy
Havells product portfolio includes industrial (wire & cable and switchgear) and consumer segments (home appliances). ICICIDirect believes that Havells’ FY21E performance will be challenging amid lockdown and slowdown in infrastructure spending. However, Havells is a strong consumer brand with over 8,000-dealer network across India.
The company is well-placed to recoup lost sales and stage a recovery in demand of industrial products whenever normalcy returns. The brokerage firm believes Havells will also benefit from its backward integration (strong supply chain) and strong balance sheet position.
Kansai Nerolac: Buy
Kansai Nerolac (KNPL) is the third-largest decorative paint company with a ~12% market share in the organised category. Over the last 10 years, KNPL has increased its decorative paint contribution in revenue from 50-55 percent.
While its decorative portfolio is likely to face challenges in the near term due to the lockdown, ICICIdirect believes the demand from the automotive industry (where KNPL is the market leader) will remain sluggish in the near to medium term due to shutdown of automotive plants.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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