4 Mid & Small Cap Stocks To Buy This Festive Season

Persistent Systems

The broking firm sees a huge 32 per cent upside potential on the stock of Persistent Systems.

Persistent Systems, a mid-size IT services company, would benefit on account of large deal wins in the past few quarters, vendor consolidation and increased focus on client mining.

"Led by a restructured sales-force and driven senior management, we believe Persistent could witness double-digit revenue CAGR over the next three years. The BFSI vertical and its Salesforce practice are likely to be key revenue drivers for Persistent.

We forecast EBIT margins to expand by 380bps over FY20-23E. While there could be pressure in the near term, due to large-deal transition costs and Covid-linked donation (100bps), it will reverse in FY22E. Lower amortization related to the IBM deal signed in the past and strong execution coupled with revenue growth will also act as margin tailwinds. Persistent trades at 16x FY22E P/E, at a slight discount to its mid-cap peers despite a combination of revenue growth and margin expansion, which is likely to drive sector leading earnings CAGR of 24% over FY20-23E," IIFL has said.

 

Security and Intelligence Services

IIFL has also recommended buying the stock of Security and Intelligence Services with a 46 per cent upside target on the stock.

Security and Intelligence Services is one of the leading providers of private security and facility management services in India.

"We believe that SIS can benefit from weakening of informal and marginal competitors in the current environment and expect SIS to be the least-impacted among business services companies. Moreover, the new set of labour reforms will enable SIS to gain market share in the fragmented industry," the broking firm has stated.

Apart from India, SIS has strong positioning in developed markets like Australia (leadership position), New Zealand and Singapore. The growth momentum is quite strong in these regions, particularly in Australia, where ad hoc contracts are driving growth and are offsetting pricing pressure.

"Moreover, the overall security services business has high ROCE and generates strong cash flow, thus providing opportunities to invest in its incubation portfolios. We expect SIS to post 7% revenue CAGR over FY20-22E aided by 10% CAGR growth in International Security Services business. Aided by strong operating performance, we expect EPS to improve from Rs 14.4 in FY21E to Rs 20.2 in FY22E. At 19x FY22E P/E, valuations are not demanding, while our estimates suggest that EPS could nearly double over FY21-2 E," the broking firm has stated.

Apollo Tyres

IIFL sees a huge 22 per cent upside potential on the stock of Apollo Tyres.

Apollo Tyres is the largest CV tyre manufacturer in India, with 25% market share in the Truck and Bus segment and 15% market share in PV segment.

"We believe that FY21E is likely to be a tough year due to continued fall in OE sales (more so in MHCVs). The situation is likely to improve sharply in FY22E, with strong rebound in OE sales and normalization of replacement demand (already evident)," the broking firm has noted.

According to it, Apollo recently announced plans to cut the Netherlands headcount by 528 (savings of €50mn).

"This, on a revenue base of €500mn in EU, will be a big margin/earnings driver from FY22E onwards. A sharp rise in depreciation and interest cost (result of high capex phase) hurt earnings over the past few years and resulted in negative FCFF.

The expansion phase is nearing its end, which implies that both earnings and FCFF should start improving. We expect Apollo to be FCFF-positive over FY21-24E. As the new capacities start generating commensurate revenue there would be a multi-fold growth in earnings over FY21-23E. We expect positive FCFF would assist in bringing down debt and resulting in lower interest outgo," the broking firm has stated.

Tube Investments

Broking firm, IIFL has suggested buying the stock of Tube Investments. The broking firm sees an upside potential of 13 per cent on the stock.

Tube Investments of India (TI), a part of Murugappa Group, has a strong established franchise across the auto and industrial sectors in India and overseas.

According to IIFL, with 56% of consolidated revenues linked to the auto sector, TI is a direct play on domestic auto recovery on account of its strong leadership position in the auto components segment (2W and PV), supported by wellspread manufacturing capacities.

"The outlook is strong for rail section supplies for coach building. The large-diameter tubes segment, driven by import substitution, should see healthy growth as demand revives in FY22-23E.

The CG Power acquisition, which is expected to close in the current quarter would enable TI to diversify away from the domestic auto segment and strengthen in industrial manufacturing portfolio. As a result of strong focus, the company has witnessed meaningful improvement across three businesses thereby improving margins while lowered W/C has improved RoIC and cash flows over the past four years. On account of recovery across business and margin expansion, we expect 17% revenue CAGR and 31% EPS CAGR over FY21-23E," the broking firm has stated.