Tremendous value in midcap companies; top 5 wealth-creating ideas for next 6-12 months
Analysts on D-Street are of the view that there is enormous value in midcap stocks, which have outperformed large caps so far in 2015.
The S&P BSE Midcap index has risen nearly 7 per cent so far in the year, compared to 3 per cent rally seen in the Sensex.
Foreign institutional investors have also reduced their holdings in majority of the blue chip companies forming the 30-share benchmark Sensex in April-June, and increased in some of the midcap names, said an ET report.
Out of the 385 stocks that have reported their shareholding pattern for the quarter ended June 2015, FIIs have increased their holdings in 180 of them, while in 190 they have reduced the stake.
According to the ET report, some of the midcap stocks that have seen an increase in FII holding include Just Dial, Ashoka Buildcon, Eveready Industries, Dish TV and Eicher Motors.
The S&P BSE Sensex is likely to remain rangebound in the near term, while stock-specific action is likely to hog the limelight on Dalal Street, say analysts.
"There are a lot of good-quality midcap companies, themes that have been unexplored or I would say at early stages of growth," says Girish Pai, Head of Research, Nirmal Bang Institutional Equities, in an interview with ET Now.
However, one needs to be careful while selecting midcap stocks, and should look for themes which can deliver good growth, which have fairly decent ROEs and ROCs and can compound at fairly decent rates.
Pai is of the view that the valuations may look a little expensive right now, but the kind of compounding you could potentially see in some of those companies is fairly large.
Analysts are of the view that benchmark indices are likely to remain rangebound, but there will be a lot of stock-specific action.
"There is going to be a little bit of lull on the market, at least in the short to medium term. On earnings, our view is that we have already gone into the earning season with an absolute low expectation. So, I do not think any small disappointment is going to drag us down," says Gurang Shah, VP, Geojit BNP Paribas Financial Services, in an interview with ET Now.
"We may see some stock-specific reactions coming in, but it is going to be more prudent to listen to the parliament session. I only hope that there is less of noise and more of work getting done, especially on the GST front," he added.
Shah is of the view that we are in a consolidation zone and markets are possibly trading at a higher end of the band. A small correction, a small profit booking should not scare us to a great extent. "By and large, it is going to be 8500-8550 on the lower side, and 8600-8625 on the higher side," he concludes.
Midcap funds have also been a clear outperformer. Midcap equity funds have generated one of the best returns across all financial assets in the past one year.
As per Value Research, a fund tracker, mid- and smallcap funds, as a category, have given a return of close to 32 per cent since July 2014 against Nifty's 10 per cent gain. The S&P BSE Midcap index rose 20 per cent in the same period.
We have collated a list of five stocks for a minimum investment period of 6-12 months:
Daljeet Singh Kohli, Head of Research, IndiaNivesh Ltd
Capital First: Target price set at Rs 650
Capital First is a good idea to look at now. Though we have been recommending it for a very long time, now it is in the next phase of growth and numbers should also be very good, so we should expect some more appreciation.
Our near-term target right now is Rs 460 after the result, and I am sure it will be revised upwards. One should look at a target of Rs 650 or so in one to one-and-a-half years.
Pennar Industries Ltd: Target price set at Rs 81
To our understanding, the value unlocking will be almost equal to what is current market cap of the company is. So, there is a big potential in Pennar Industries also. In any case, we have a target for Pennar Industries at Rs 81 as of now.
G Chokkalingam, Founder, Equinomics Research & Advisory pvt Ltd
Coromandel International Ltd: Target price set at Rs 300
It is my top pick because it is a highly beaten-down stock. It is down by about 25 per cent from the recent peak. Coromandel International is a most efficient phosphoric fertiliser company. The capacity utilisation is just around 70 per cent. Hence, there is a lot of scope for improving the output even in non-subsidiary business like pesticide and insecticide.
The company has got access to phosphoric acid - a core raw material - from Africa. It has got two joint ventures. It is supposed to supply its produce at reasonable prices.
There has been a 6 per cent rainfall deficit at an all-India level so far this year, but the states to which this company caters have got reasonably good rainfall. Therefore, I firmly believe this stock can easily provide a target price of Rs 300 in a span of 6-12 months.
Reliance Communications Ltd:
I have picked up Reliance communications, which is also a beaten-down stock. Last year, the QIP was done at Rs 150; now it is down more than 50 per cent from that level.
Not only is the stock cheap, I also firmly believe that the group would monetise assets like tower, real estate, the global fibre optic business, etc. The value potential from these assets is slightly more than the total debt it has at a consolidated level. Even if 50 per cent of these assets are monetised, the earning per share can jump beyond Rs 10.
Secondly, this particular group is coming close to China and Russia in terms of business alliances. Recently, we saw its defence business also getting into alliance with Russian ventures.
Now, this group has proposed to take over Shyam Telecom in which Russian telecom giant Sistema has got stakes. In case they take over Shyam Telecom, it will be an opportunity for the company to forge stronger relationship with the Russian telecom giant.
Considering all these facts, I firmly believe that RCom can be a wealth-creating idea for the next 1-2 years.
Brokerage Firm: Sharekhan
Orbit Exports Ltd: Target price set at Rs 630
Orbit is a leading manufacturer and exporter of novelty fabrics exporting its products to over 32 countries. The company is a recognised star export house and operates in the niche area of high-end fancy fabrics, which are mainly used by designers in women's fashion apparels.
Thus, they expect the stock to get re-rated (in line with its peers like Kitex Garments). We initiate coverage on Orbit with a Buy rating and value the company at 22x its FY2017E earnings to arrive at a price target of Rs630.
(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 stock(s) mentioned.)