Vinod Nair, Head Of Research at Geojit Financial Services said since the valuation of mid and smallcaps is below the long-term averages, they are bound to outperform
In the last 15 days, not just the benchmark indices but the broader market has also performed well. Nifty and Sensex have hit their respective all-time highs and Nifty Midcap index has risen 8 percent and Smallcap index has gained 9 percent since May 15.
This is contrary to the trend in the last one year during which Nifty spiked 12.5 percent but the midcap index was down 5 percent and smallcap index had plunged 16 percent.
Experts opine that the broader market will continue to buck the trend. "While the benchmark indices are trading at peak valuations, BSE Midcap index is still trading nearly 18 percent below its peak level, which leaves enough room for appreciation," Jayant Manglik, President - Retail Distribution, Religare Broking told Moneycontrol.
He said midcap counters with valuation comfort, improving earnings prospects, prudent management and healthy balance sheet can certainly be considered for investment purpose for mid to long-term investment horizon.
Manglik further said that taking a stock specific view rather than timing the markets would certainly be a prudent approach now.
Vinod Nair, Head Of Research at Geojit Financial Services has a similar opinion and said since the valuation of mid and smallcaps is below the long-term averages, they are bound to outperform.
"Broadly, the overall mid and smallcaps are likely to outperform the market while select bottom-up story and sectors like finance, infrastructure, chemicals, cement and industry oriented can do better," he added.
Here are 10 mid and smallcap stock where brokerages initiated coverage with a buy call:
Brokerage: Nirmal Bang
Tata Chemicals: Buy | Target: Rs 749 | Return: 18 percent
The recent decision of Tata Chemicals, an Indian salt and soda ash giant, to hive off consumer business is positive as this transforms the company into a focused chemical and speciality company. The growth from speciality including nutrition and silica will likely gather momentum from FY21 based on the new capacity being set up at a cost of Rs 570 crore.
The crop protection chemicals (CPC) subsidiary, Rallis India, is the weak link that could surprise on the upside based on its impressive portfolio including new products launched in the past two years. Sustained operational gains, cost leadership, and high capacity utilisation should support healthy EBITDA margin in Tata Chemicals' chemistry products.
We expect a re-rating in the stock based on volume growth prospects in chemicals and speciality, after the Rs 2,400 crore capex. We initiate coverage on Tata Chemicals with a buy rating and a SOTP-based target price of Rs 749.
Brokerage: IDBI Capital
Cera Sanitaryware: Buy | Target: Rs 3,471 | Return: 16 percent
It is a leading bathroom solutions provider in India and is amongst the top three players of the organised sanitary ware market, with a market share of 15 percent.
We estimate net sales/EBITDA/PAT to grow at a CAGR of 14.0/17.7/18.6 percent over FY18-21E.
Kajaria Ceramics: Buy | Target: Rs 759 | Return: 18 percent
With a capacity of 68 mn sqm, it is the largest player in the domestic tile industry and ninth largest tile manufacturer globally. The company offers 2,800 SKUs in ceramic tile/PVT/GVT and 250 SKUs in sanitary ware and faucet segment.
We expect the company to clock net sales/EBITDA/PAT CAGR of 11.5 /13.2 /16.7 percent over FY18-21E.
Somany Ceramics: Buy | Target: Rs 576 | Return: 32 percent
It is one of the largest players of the domestic tile industry with a capacity of 63mn sqm (includes owned, JV/Associate and outsourced capacity). The company is present across ceramic, PVT, GVT and has also forayed into sanitary ware (FY10) and Faucet ware (FY11).
The management’s thrust on increasing share of value-added products in total sales has been instrumental behind healthy sales growth over the years. We forecast net sales/EBITDA/PAT CAGR of 8.9/6.5 /10.6 percent over FY18-21E.
Brokerage: HDFC Securities
Maithan Alloys: Buy | Target: Rs 900 | Return: 36 percentManganese alloys are critical for steel manufacturing translating into a large globally addressable market for Maithan. Company's customers include marquee domestic/global steel majors, with most of them being
The company produces around 1 percent of total global manganese alloy supply, which means there is little offtake risk. This, coupled with the fact that Maithan is amongst the lowest cost producers in the world, makes them amongst the last men standing in case of any global commodity downturn, especially steel. It is also noteworthy that China discourages the export of manganese alloys (seen as energy intensive).
We initiate coverage on Maithan Alloys with a buy rating and a target price of Rs 900 (base case) based on conservative assumptions. Our upside (and downside) cases yield target prices of Rs 1,500 (and Rs 375).
Brokerage: Ventura Securities
Maharashtra Seamless: Buy | Target: Rs 595 | Return: 30 percent
With the acquisition of United Seamless Tubular, MSL’s total capacity stands augmented to 900,000 MTPA. This acquisition is quite opportune considering the fact that we are at the cusp of a turnaround (given the improving procurement from the E&P segment and anti-dumping duties on Chinese seamless pipes).
Hence, we expect net revenues to grow at a CAGR of 34.9 percent to Rs 7,127 crore during FY18-22E. With EBITDA per ton expected to be rangebound (Rs 13,000-15,000 per ton), we estimate an EBITDA CAGR of 42.1 percent to Rs 1,267 crore and net earnings CAGR of 47.4 percent to Rs 784 crore over the same period.
At the CMP of Rs 458, the stock currently trades at the P/BV of 0.68x FY22 earnings. We initiate with the buy for a price objective of Rs 595 (0.85x FY22).
Ratnamani Metals & Tubes: Buy | Target: Rs 847 | Return: 15 percentWe expect RMTL’s sales volumes to grow at a CAGR of 17 percent to 4.11 lakh
ton between FY18-22E. We expect further improvement in the realisation by around 3.0 percent CAGR to around Rs 95,000 per ton by FY22.
As a result, revenue is expected to grow at a CAGR of 22.6 percent to Rs 3,997 crore during FY18-22E. Similarly, the EBITDA per ton is expected to remain in the range of Rs 13,000-14,000, leading to an EBITDA CAGR of 23.8 percent to Rs 482 crore.The stock is currently trading at the FY22 forwarded P/E of 11.4x. We are
valuing RMTL at FY22 P/E of 15x at the target price of Rs 1,114.
Welspun Corp: Buy | Target: Rs 192 | Return: 34 percentWCL is expected to witness a strong performance across its three
geographies – India, USA and Saudi Arabia. With the Saudi Arabia business
turning EBITDA positive in FY20 and increased order inflows in the US
business, the Indian operation will no longer be the only business driver for
WCL’s consolidated business in the coming years.
We expect the company to be net debt free by FY20 and the PAT to grow at a CAGR of 55.8 percent to Rs 870 crore by FY22.
The stock is currently trading at the FY22 forwarded P/E of 4.4x. We are valuing WCL at the FY22 P/E of 6.5x at the target price of Rs 192.
Jindal Saw: Buy | Target: Rs 119 | Return: 33 percentJSAW is a well-diversified domestic & global play in the metal pipe industry
with a considerable presence in SAW (20 lac MTPA capacity), Seamless (2.5
lac MTPA capacity) and DI (10 lac MTPA capacity) pipe segments.
Easing debt burden and strong margin profile improved interest coverage from 1.89x to 2.05x during H1FY19. JSAW management has guided for the net debt to come down to Rs 2,500 crore by FY21 due to improvements in the working capital cycle and annual debt repayment of Rs 250 crore.At the CMP of Rs 83, the stock currently trades at adjusted P/BV of 0.33x FY22 on a standalone basis. The adjusted BV is at Rs 238 per share (BV of
standalone = Rs 251 per share less negative BV of its subsidiaries = Rs 13).
We initiate with a buy for a price objective of Rs 119 (0.5x FY22).
Brokerage: SMC Global Institutional Equities
Hi-Tech Pipes: Buy | Target: Rs 410 | Return: 27 percent
We have valued Hi-Tech Pipes on EV/EBITDA multiple and valued it at discount (25 percent) to its peer APL Apollo Tubes as the later continues to have a lion's share in the industry, followed by better financials and prudent management.
While this valuation gap may persist over time, Hi-Tech Pipe's growth is expected to be impressive (revenue/EBITDA/PAT CAGR of 18 /23.3 /39.4 percent).
We, therefore, value the stock at 6x EV/EBITDA on FY21E EBITDA of Rs 1,13.6 crore, indicating an upside of 29 percent from current levels. We initiate coverage with a buy rating on the stock.Disclaimer: The views and investment tips expressed by brokerages and experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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