Midcaps might have underperformed the Nifty or the Sensex in 2019, but quality stocks stayed resilient and got due attention from buyers, global investment bank Jefferies has said in a report.
Despite a broader correction in midcaps in 2019, when the NSE Midcap was down 5 percent compared to the Nifty rally of about 12 percent, quality stocks have been largely resilient, the report says.
Demand slowdown and tight liquidity remain key macro concerns. According to Jefferies, the main factors that will influence midcaps in 2020 are government initiatives to boost demand, traction in organised segment, premium product launches, raw material trends (global commodities) and B/S strength.
Jefferies top picks include Supreme Industries, Kajaria Ceramics, and V-Guard Industries. It also remains positive on Finolex Industries, UPL, Graphite India, and HEG.
According to the investment bank, India is witnessing a broader demand slowdown and liquidity crunch since mid-2019. To boost the economy, the government announced a host of measures such as incentives for real estate and housing, reduction in corporate tax to around 25% and reviving capex.
The measures that centered around socio-economic welfare include sanitation, especially in rural areas (Swachh Bharat Mission), affordable housing (PMAY), piped drinking water for all households by 2024 (Nal Se Jal Scheme) and a rural electrification programme.
These could benefit building materials—electrical, plastic pipes, tiles and sanitaryware.
V-Guard & Havells India
Subdued demand and tight liquidity remain key concerns. However, a diversified mix, market leadership and entrenched reach could help V-Guard Industries (buy) and Havells India (buy) to tide this slowdown. V-Guard took price hikes in Q4FY19; also, FY19 was a low base marred by Kerala floods.
Supreme Industries & Finolex Industries
Supreme Industries (buy) is the market leader in PVC pipes, while Finolex Industries (buy) leads in agri-pipes. Jefferies expects a steady growth in the core pipes segment, backed by replacement demand and government initiatives.
However, allied product segments could be impacted by weak demand. Also, volatility in raw materials (especially PVC, CPVC) remains a key monitorable.
Extended rains, subdued construction, liquidity crunch and weak sentiment could weigh on Kajaria (buy) in H2FY20e. But, medium-term triggers remain robust i.e. market share gains from the unorganised segment, government impetus to housing, optimised mix and entrenched brand and distribution.
Jefferies is bullish on UPL (buy), given the scale and product mix benefits from Arysta. Interim hiccups (PPA adj, leverage, capex) could iron out by synergies and accretive C/Fs. Global channel inventories and UPL's regional mix remain monitorable.
Graphite India & HEG
The industry is facing multiple challenges--demand headwinds, softer realisations and shrinking spreads. Factoring such weakness, Jefferies has lowered its FY20-22e realisations and capital utilization estimates.
But it retains buy on Graphite India & HEG on inexpensive valuations and strong balance sheet.
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