Investors eye midcap stocks after correction; top ten wealth-creating ideas
The S&P BSE Midcap index has plunged nearly 7 per cent in the past one month, with some of the stocks declining by up to 50 per cent.
The S&P BSE Midcap index has plunged nearly 7 per cent in the past one month, with some of the stocks declining by up to 50 per cent. Unitech (down 47%), Jaiprakash Associates (down 40 per cent), Adani Power (down 30 per cent), Sun TV (down 20 per cent) are some of the stocks that fallen sharply in the last one month.
Indian equities have been bogged down by a number of domestic and global factors in 2015. The slide seen over the last three months was driven by RBI's cautious approach to rate-easing, muted corporate earnings growth, uncertainty around US Federal Reserve rate hike, and mounting Greece debt concerns.
The news flow still remains unfavourable. The outlook on monsoon has turned bleaker, with the India Meteorological Department revising the monsoon forecast for this year to 12% below normal.
The weak quartely results led to another round of downgrades in the consensus earnings estimate and hinted at a delayed and possible slower pick-up in corporate earnings in the quarters ahead.
Despite headwinds, analysts say that there is value in quality midcap stocks and investors with a long-term horizon should use every opportunity to add stocks to their portfolio.
Investors who had missed out on the market surge last year onwards are happy with the recent correction in equities, and are exploring opportunities to deploy money in the midcap space, Anant Shirgaonkar, Head-India Equities, UBS Securities, told ET Now.
"So they (investors) want to find out two things - one is how the things on the ground are moving and hear from the corporate about whether they are seeing signs of change in terms of growth coming back or order flows coming back," Shirgaonkar said about investors who have assembled in Mumbai for a midcap conference.
The right strategy that investors should use is to first find out stocks which they want to invest in, and wait for the right time or valuations which they are comfortable with - as more correction could be in the offing.
"The strategy is that you should wait. You (investors) should not buy anything immediately because we are expecting some more pain," says Daljeet Singh Kohli, Head of Research, IndiaNivesh Ltd.
"We have changed our portfolio strategy, tilted towards large cap and high-quality midcaps, and moved away from the stocks where there was this lot of hope built around regarding the revival in economy, GDP revival and all those things," he adds.
Analysts are bullish on the NBFC space in the midcap universe. The whole theory behind this space is that the government has been putting in efforts to rein in inflation, and that would probably lead to lower interest rates in future.
“One of the bigger themes that UBS has been talking about for about the last one year now has been that inflation in India is cyclical, and govt is doing everything to rein it. Our call that the wholesale rates in the system will come off, and we are saying that the 10-year yields will actually go down to something like a 6.5% by the end of next year,” says Shirgaonkar.
"If that be the case, then one of the bigger beneficiaries would be rate-sensitives and that is where the NBFCs come in, so lower interest rates led by lower inflation would lead to highest benefits for some of these wholesale borrowers," he adds.
We have collated a list of ten stocks that could produce smart gains in the next 6-12 months:
Analyst: Daljeet Singh Kohli, Head of Research, IndiaNivesh Ltd.
Aurobindo Pharma Ltd: Target price set at Rs 1600
The brokerage remains positive on the stock. It sees an implied potential upside of nearly 20 per cent from current levels. The brokerage believes that the company is in a sweet position to maintain a sustained increase in sales as well as profitability over the next 2-3 years.
"ARBP (Aurobindo Pharma) has a cumulative filing of 376 ANDAs at the end of Q4FY15, the cumulative ANDAs pending for approval stand at 183, which have a good mix of complex molecules which would enable not only enhanced sales growth but also improve profitability for sustained period. The faster turnaround of acquired Actavis operation in Europe would also help in further improvement in overall margins of the company," the brokerage said in a research note.
Mangalam Cement Ltd: Target price set at Rs 376
Mangalam Cement has the potential to improve its sales and margin from current levels without incurring further capex as current capacity utilisation stands at 70 per cent.
As the new government has already announced many ambitious plans like more road length construction every day, housing for all and smart cities, even a small pick-up in infra activity can boost the plant utilisation levels of the company. This will further improve EBITDA/tn ratio of the company from current levels.
At CMP of Rs 230, Mangalam Cement is trading at FY16E and FY17E, EV/EBITDA EV/EBITDA multiple of 8.2x and 7.0x, respectively. We maintain a 'BUY' rating on the stock with PT of Rs 376.
Mastek Ltd: Target price set at Rs 724
According to Garner Property & Casualty (P&C), insurance industry spends an yearly $15 bn on ageing legacy systems & services. Out of this, $6-7 bn could migrate to third-party Software & Services vendors like Majesco-US.
Demerger (Services & Platform) and listing of Majesco-US on NYSE could lead to significant re-rating and improvement in performance going ahead. The standalone services business profitability and ROE is likely to improve, which would lead to P/E multiple expansion.
On the other side, listing on NYSE will bring re-rating to platform business. Currently, platform business is valued at 0.6x (v/s 6.7x P&C platform of peer) of EV/Sales.
Pennar Industries Ltd: Target price set at Rs 70
PEBS (66.85% subsidiary of Pennar) has witnessed a revenue CAGR of 35.6% over FY11-14 period and the brokerage expects the separate listing of PEBS (DRHP filed with SEBI) will help the company unlock value of this high-growth business.
Pennar Industries is trading at FY16E and FY17E, PE multiple of, 9.9x and 7.1x. We maintain a 'BUY' rating on the stock with revised target price of Rs 70 (11x FY17E EPS).
Capital First Limited (CFL): Target price set at Rs 465
IndiaNivesh believes that CFL is well poised to grow at 28% CAGR in FY15-17E, mainly led by retail credit assets. "We expect the company will be able to improve its margins further from current level of 5.8% in FY15 to 6.0% in FY16 with change in borrowing mix and company's increasing presence in high-yielding segments (i.e. two-wheeler and consumer durables loans).
Due to the company's prudent management practices, focused lending approach, quicker turnaround time and healthy adequacy position, we believe the current growth momentum can continue over FY15-17E, it said.
Brokerage Firm: Sharekhan Ltd
Aditya Birla Nuvo Ltd: Target price set at Rs 2150
Aditya Birla Nuvo (ABN), a conglomerate holding company, is present in different businesses ranging from lifestyle, telecom, fertilisers to financials, with each having either leadership or a strong competitive position in its market.
The company's strong position in each of its business verticals (life insurance, telecom, lifestyle and asset management) will pave the way for growth.
Also, the company's efforts to implement the necessary restructuring steps to unlock value for its minority shareholders through disinvestment of the sub-scale businesses (carbon black and business process outsourcing), demerger of growth businesses or consolidation within the group are likely to enhance the shareholders' value in this quality conglomerate business.
Ashok Leyland Ltd: Target price set at Rs 78
Ashok Leyland Ltd is the second largest CV manufacturer in India with a market share of 25% in the heavy truck segment and an even higher share of about 40% in the bus segment. Given the scale of economic slowdown, the segment had halved over FY2012-14. With a pick-up in the economy, a sharp recovery is expected in the segment.
Ashok Leyland's operating profit margin (OPM) has recovered from the lows on the back of a reduction in discounts and price hikes taken by the company. Its margins are expected to expand further, given the operating leverage. The company has raised Rs 660 crore via a qualified institutional placement and sold non-core assets to pare its debts.
Century Plyboards Ltd: Target price set at Rs 290
Century Plyboards (Century) is a leading player in the fast-growing plyboard and laminate segment, with an overall market share of around 25% of the organised plyboard market and an estimated size of Rs 4,500-4,800 crore annually.
Sharekhan is of the view that Century, with its top-of-the-mind brand recall, is well-positioned to ride the economic revival-driven recovery in demand and increase its market dominance in the plywood and laminate segments.
They expect it to post a 31.3% earnings CAGR over FY2015- 17. The implementation of GST would provide a fillip to revenue and earnings performance. In view of these positives, we maintain our 'Buy' rating on the stock.
Analyst: Gaurang Shah, Geojit BNP Paribas Fin Services
Power Grid Ltd: Target price set at Rs 186
Given the kind of outlook and the optimism that the new government has in terms of 24x7 power supply, we believe, in the next two-three years, you will have new power generating capacities coming up and these power generating capacities will definitely need transmission and distribution line.
That is where Power Grid will play one of the most important roles because it is one of the largest power transmission and distributing company. The problem here is that the capex, which was required to come up, is really not coming up in terms of transmission and distribution expansion, and here you have a company with management which is committed to a great extent in terms of increasing that capex by huge investments. So, keeping in mind one year plus kind of the time horizon, we are working with a target of 186 on Power Grid.
CESC: Target price set at Rs 629
Barclays starts coverage with an "overweight" rating, and a target of Rs 629. The brokerage firm says that current valuations have discounted the coal block de-allocation in September, 2014. The stock is trading at 11 times of 1-year forward earnings, Reuters reported.
The stock is down 23 per cent since the start of September and has 15 buy, 4 hold and 4 sell ratings, as per the report.
(Views and recommendations expressed in this section are the analysts' own and do not represent those of EconomicTimes.com. Please consult your financial advisor before taking any position in the stocks mentioned.)