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Last Updated : Dec 02, 2019 02:11 PM IST | Source:

Time to revisit midcaps? Citigroup picks top 11 stocks that are worth a look

The valuation discount of midcaps, when compared to largecaps, is close to 10-year high, highlighting the improved risk reward and low expectations.

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Midcaps can turn out to be big wealth spinners for those looking to remain invested in the market for more than a year.

Return-hungry investors are always in search of stocks trading at cheaper valuations compared to peers or historical averages and have the potential to deliver growth in the near future.


The reason to buy mid or smallcaps is the high return potential if one can pick a multibagger, Citigroup says in a November 25 research report.

“We have looked at the last 10 years' performance to see what the odds are and no surprises. It remains tough to call those multibaggers, as only 2 percent of smallcaps become largecaps, while 20 percent no longer exist (or are no longer listed),” the report says.

The valuation discount of midcaps when compared to largecaps is close to 10-year high, says the global investment bank, highlighting the improved risk reward and low expectations.

Citigroup handpicks 11 stocks from the midcaps space that are worth a look:

Citigroup Midcap


ACC’s stock trades at close to replacement cost ($100/t). Cement prices have been largely resilient post-Diwali, and the global investment bank expects a demand-driven price improvement going into the New Year.

9M EBITDA/t at Rs 885 is 19 percent higher on a YoY basis, setting a high base for CY20. Further, Emami Cement’s potential acquisition by an existing large player should help consolidate the East market (>25% of ACC’s volumes).

Apollo Hospitals

Citigroup expects Apollo Hospitals to consolidate and build on the turnaround seen in FY19. The company’s heavy-beds expansion phase has ended and new hospitals are ramping up well.

Rising occupancy across would drive topline/margins, and Citi also sees scope for debt reduction (insurance stake sale, pharmacy reorg) and improving return ratios.


Biocon’s biosimilars business is at an inflection point. While share gains will be gradual, the increasingly biosimilars-friendly regulatory and policy framework augur well.

In the near term, Citigroup expects the earnings momentum to pick up in 2HFY20 on the back of Fulphila ramp up (once new capacity is available) and Ogivri launch in the US–both of which should be key catalysts for the stock.


Citigroup's buy rating is premised on strong volume growth and margin comfort, aided by continued focus on environmental issues in Delhi and benign gas prices.

Completion of the Gurugram acquisition is a key near-term trigger. The PNGRB’s move to introduce CGD (city gas distribution) tariff regulations and common carrier guidelines faces several legal challenges, and Citi sees little impact on the ground for the CGDs.

The key investor pushback is on high valuations (25x P/E). A key risk is any change in the domestic gas allocation policy that accords highest priority to CGDs.

JSW Energy

JSW Energy is emerging as a consolidator in independent power producers (IPP) space with its strong balance sheet, cash flows and technical and managerial capability.

Currently, the company has around 4,600MW of operational power capacity and has a target of reaching 10GW over the next three-five years. JSWEL has already emerged as a front runner in the acquisition of the Ind-Barat (700MW) power project at around 80% haircut to incurred capex so far.

Due to strong cash flows, consolidated net debt fell by Rs 5.1 billion QoQ in 2QFY20 to Rs 97 billion, indicating a strong underlying cash generation. The net debt to equity improved to 0.83x from 0.86x in 1QFY19 (0.98x in 2QFY19).


Just Dial's (JD) first-mover advantage and high user mindshare have helped it become India's leading local search provider. Its focus on core search in recent quarters has resulted in growth re-acceleration.

Citigroup expects the trend to persist over FY20-22E as well. JD does face medium-term growth risks owing to competition from players such as Google and other vertical-focused internet start-ups. But, it continues to weather the competition well.

The traffic growth remains strong, and expansion into Tier-II/III towns, with a rejigged sales-force strategy, positions it well to continue to leverage India's internet growth trajectory.

L&T Finance 

L&T Finance Holding stock has corrected around 25 percent in the last six months largely on concerns over its asset quality and real estate exposure.

Citigroup’s recent deep-dive analysis shows that market concerns of developer loan defaults are overdone for LTFH. Most of the IL&FS exposure (Rs 18 billion) is marked in the ‘green’ category.

LTFH benefits from strong parent backing, which provides them better access to funding and supports higher leverage. The company has maintained a positive liquidity gap within all tenors ranging up to one year.

L&T Infotech (LTI) 

LTI has been growing ahead of the market and consistent large deal wins provide visibility. Large client issues, which impacted 1H, seem to be largely behind the company.

For FY20E, LTI appears confident of delivering double-digit growth, with net margins of 14-15 percent. Citi expects the growth rate to improve in FY21E (given that client-specific issues pulled down growth in FY20).

Valuations at ~17x 1-year forward consensus look reasonable given the delivery track record (over the past couple of years) and the company’s positioning in the sector.

The other investor focus is on MindTree (another L&T company in the space) and a potential merger with LTI at some stage.

Phoenix Mills (PML) 

PML continues to benefit from 1) the presence of malls in prime locations 2) experience in setting up, scaling up and operating the malls 3) large size (~1msf per mall) of malls which helps make malls destination for customers.

PML participates in consumption in its malls as it has a revenue share in the revenue of most tenants. Consumption growth, in turn, is a function of both an increase in consumption volume and price inflation.

Once a mall is commissioned, it provides steady EBITDA growth for a long time. PML has a strong balance sheet, steady growth in mall EBITDA, and ample pipeline of new mall assets funded in a low-risk way.

The valuation appears reasonable and it does not build in upside from the above-mentioned 5msf under construction portfolio.

Polycab India 

Polycab has emerged as the market leader in the cable and wires industry and a successful entrant into FMEG space through a mix of large and quality manufacturing base, wide distribution reach, professional management combined with a vision of promoter family, focus on the balance sheet and cash flows and efforts to re-orient the company into B2C mindset.

Citigroup believes that due to a healthy balance sheet, internal cash generation, distribution, brand and execution, Polycab is well placed to capitalise on the growth opportunities in cables, wires and FMEG industries.

The stock is trading at ~18x FY21E EPS, and the global investment bank believes that there is more room for rerating, as the company delivers on FMEG business growth along with further improvement in BS and cash flow.

SRF India 

SRF has not only emerged as the largest manufacturer of refrigerant gases in India but also is seeing strong traction in its specialty chemical business.

Using strong R&D skills in fluorine chemistry, SRF has managed to launch several new generation ref-gases and specialty chemical molecules.

Despite a hiccup in 1QFY20 (due to pollution control issue), SRF is on track to achieve a 40-50% growth in specialty chemicals. The stock is trading at 23x P/E on FY21EPS.

Disclaimer: The views and investment tips expressed by investment experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

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First Published on Dec 2, 2019 01:40 pm
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