The mid-cap stocks have finally resolved out of the bear phase after three years. BSE's Midcap index hit a new all-time high for the third consecutive session on Friday, climbing to 19,161.20.
Analysts believe that the index has logged a resolute breakout from the three years falling trend line, indicating resumption of a major uptrend.
Amid falling interest rates on deposits, many investors have been betting on stocks for returns and at the moment, with markets elevated, large caps look expensive causing a spillover on quality stocks in the mid-cap and small-cap space.
ICICI Securities' picks
ICICI Securities believe that broader market would relatively outperform the benchmark in the medium term and picked five mid-cap stocks after rigorous research that could provide "handsome" returns.
"Within mid-cap space we have spotted consumer discretionary sector based on its higher relative strength ranking, where we can capture higher beta. We have run rigorous filters to identify such stocks that have the ability to withstand storm and relatively outperform the benchmark as these stocks have approached their key supports and thereby offers favourable risk-reward," the brokerage said.
ICICI Securities' picks: Voltas, Crompton Greaves, Vguard, Symphony and Bajaj Electricals.
Axis Securities' midcap picks
Axis Securities noted that after a prolonged period of weakness, the small and mid-cap stocks have outperformed the large-cap indices by a significant margin.
"The year 2021 will be a year of economic revival with GDP growth rate closer to double digits. Notwithstanding the low base, the economic revival will usher stronger earnings growth. In a year of strong earnings growth, mid and small caps tend to see market-beating earnings growth and rerating. Small and mid-cap stocks are likely to deliver very strong returns and when combined with other dominant themes then returns will be even stronger," the brokerage said.
Its preferred themes for the year include Digital, Healthcare and Telecom. The brokerage believes that while all these themes were promising even before COVID-19, the pandemic has resulted in business transformation decisions which were unthinkable a year ago.
Axis Securities's midcap picks:
1. Relaxo Footwear
With a target price of Rs 925, the brokerage explained it picked the stock because of:
- Mass and value proposition the core
- Healthy return ratios and balance sheet
- Further Capex to drive growth
2. Amber Enterprises
With a target price of Rs 2,800, the brokerage explained it picked the stock because of the following factors:
- Most backward integrated player in India and strategic plant locations
- Strong traction in RAC demand
- Increased localisation to aid business
- Commercial AC segment foray
- Planned capex to augur well with PLI on the cards
3. Star Cement
With a target price of Rs 115, the brokerage explained it picked the stock because of the following factors:
- Capacity expansion to drive volume and revenue growth for the company
- Strong market presence in its key market of North East & growing in East India
- Integrated nature of operation with efficient cement plants
- Healthy Financials to support future growth
HDFC Securities' Picks
HDFC Securities Retail Research has filtered a handful of stock ideas for the next two quarters which the brokerage believes may earn between 20% and 29% from their current market price in up to six months.
1. Spandana Sphoorty Financial
Target Price: Rs 928
The third-largest NBFC-MFI in India with AUM (Assets Under Management) of Rs 7,354 crore, has strengthened its risk management process after every crisis and diversified geographically to reduce the impact thereof, said the brokerage.
Post the easing of lockdown all its branches became operational by May-end. It has provided for ~6% of its portfolio and with improving collection trends (Oct-20 absolute collections at 110%) might not be required to make significant provisions going forward, HDFC Securities said. NPA levels are comfortable and capital raising in the last few years has led to a strong capital adequacy ratio of 45%, it added.
2. Dollar Industries
Target Price: Rs 273
HDFC Securities Retail Research believes that post the introduction of GST and the COVID-19 outbreak, low-ticket sized branded knitted-wear as a category is all set to go through a structural shift. The brokerage expects the company to record a Revenue and PAT CAGR of 6% and 20% over FY20-23E. Higher PAT growth is likely to be mainly driven by cost rationalization measures and debt reduction.
3. Healthcare Global Enterprises
Target Price: Rs 198
Having doubled bed capacity over the last five years, the brokerage expects HCG's capex phase to ease from FY21. "Large part of bed expansion is done and we expect incremental losses to be offset by earlier hospitals turning positive," says HDFC Securities.
In the past 36 months, HCG launched 7 new cancer care facilities across the country, reaching out to more cancer patients across metros as well as Tier-I & Tier-II cities.
4. DCB Bank
Target Price: Rs 144
DCB Bank has managed to maintain healthy capitalisation, sustainable and calibrated growth in advances with continued focus on the SME segment, competitive NIMs, comfortable asset quality with stable management team, HDFC Securities said. The company has strong capital adequacy, a comfortable liquidity position, a resilient operating model and increasing retail mix.
The retail focus will help the Bank to deliver double-digit growth in loan book from next fiscal, the brokerage said.
5. Coal India
Target Price: Rs 165
"The focus on renewable and other clean forms of energy sources remains a concern for the longer term, however we believe that those concerns are already factored in the current prices. Coal India has taken major initiatives to build matching logistics infrastructure to ensure evacuation of planned quantity of production," says HDFC Securities.
The stock has significantly underperformed the benchmark indices over the last few years on the back of multiple factors acting against the company. The brokerage believes most of the negatives are priced in and the extent of de-rating in the stock is not justified given its fundamentals.
"We however do not have a very positive view on the stock for the long term but feel that there is tactical opportunity for the short term in the stock," says HDFC Securities.
6. Birla Corporation
Target Price: Rs 874
The industry has a high dependence on real estate and infra sector which is expected to be impacted due to expected slowdown in the economy, says the brokerage.
Going forward, HDFC Sec expects a gradual recovery in cement demand and volumes are likely to pick-up from the second-half of FY21. In the case of Birla Corp, incremental volumes from the commencement of additional capacities will result in a lower decline in volumes compared to the industry. Also, on the demand side, key growth drivers are likely to be picked up in rural housing, Pradhan Mantri Awas Yojana (rural), Pradhan Mantri Gram Sadak Yojana and spending on key infrastructure projects.
Jefferies India feels that the underperformance of the midcap segment has reversed. It believes that the continued easy global liquidity and expected cyclical recovery in India should be a supportive environment for mid-caps.
The brokerage's analysis of past performance suggests that mid-caps have tended to outperform large caps when growth accelerates in India or is trending high.
"With GDP growth rising to 13% in FY22, and broad-basing happens in economic activity thanks to a cyclical pick-up in property, mid-caps should do well," it said.
"2021 is likely to mark the turn in the property cycle which is likely to benefit companies across the value chain," the report said.
Jefferies India likes Oberoi Realty, Kajaria Ceramics and Supreme Industries.
Its other mid-cap picks include Varun Beverages, Graphite India, Dixon Technologies, MGL, IGL and Container Corporation of India.
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