Midcap stocks have been outperforming small caps and blue chips stocks since the beginning of the ongoing financial year(2015-16). The BSE Midcap index jumped 6.63 per cent to 11,502.55 on August 11 from 10,786.68 on April 1. On the other hand, the BSE Smallcap index gained 3.92 per cent while the BSE Sensex dipped 1.39 per cent during the same period.
Going forward, analysts expect midcap stocks would continue to outperform the broader markets with improvement in demand cycles and profitability.
Jimeet Modi, chief executive officer, SAMCO Securities, said, “The valuation of good midcap stocks are on the higher side but still investors tend to buy these stocks. This is because there are very few good companies available which have the potential to give extra ordinary returns. Few examples, Motherson Sumi, Marksans Pharma, Eicher motors have price-to-earnings ratio of over 60 but still it is a strong buy for many of the broking houses and attracts good volume.”
Out of 77 stocks in the BSE Midcap index, 17 stocks jumped over 20 per cent during April 1 and August 13. Share price of Essar Oil jumped the most 83.51 per cent to Rs 201.91 during the period, followed by Britannia Industries (up 54.21 per cent to Rs 3,361.85), HPCL (up 45.93 per cent to Rs 953) and Indiabulls Housing (up 39.99 per cent to Rs 801.45).
Abhishek Anand, fund manager, Centrum Broking, said, “From here on within midcap stocks, we see more of company specific movements. We expect companies with better financials to see continued investor interest.”
During April 1 and August 13, share price of JP Associates, Unitech and Adani Power dipped 56.49 per cent, 52.37 per cent and 43.46 per cent to Rs 10.9, Rs 7.74 and Rs 27, respectively.
Vaibhav Agrawal, vice-president and head of research, Angel Broking said, “Midcap stocks will continue to outpace other in the ongoing financial year. Amongst mid-cap stocks, we like equipment manufacturing stocks, mainly in the construction and mining space. We like medium and heavy commercial vehicle (MHCV) related ancillaries as well. In the consumer space, we expect liquor stocks to trade favourably in anticipation of improvement in industry prospects. We also expect the education sector to do well with an increase in government focus towards education and skill development; among other sectors.”
Factor to watch
According to market experts, midcap companies tend to have higher risks associated with them on account of smaller bases, niche business models, cyclicality in earnings, liquidity etc. All these factors also tend to make them attractive investment opportunities as they are able to deliver a higher growth and consequently a higher return when times are good.
Nitasha Shankar, vice-president, research, YES Securities, said, “Compared to the stable earnings performance of large cap companies makes mid cap outperform the larger cap peers during bull runs. However, the same risks tend to make them react equally sharply to any downturns. Keeping these risks in mind is crucial when it comes to investing in midcaps. In our opinion the theory behind investing remains the same irrespective of whether the company is a mid cap or a large cap. If fundamentals are strong, then it makes sense to use any sharp selloffs or knee jerk reactions as an opportunity to buy these stocks.”
Six midcap stocks that are a good investment bets
Motherson Sumi Systems
Recommended By: YES Securities
Current Market Price*: Rs 343.35
Why Buy: Motherson Sumi Systems Ltd (MSSL), along with its subsidiaries, the company is a leading global manufacturer of auto components that include rearview mirrors, plastic components, wiring harnesses, etc.
The company has been able to grow its footprint in the global markets through acquisitions that have been customer driven. At the same time it has been able to expand its returns on capital employed as well. The new 5 year vision outlined by the management can make the company one of the largest auto component manufacturers of the country.
Recommended By: YES Securities
Current Market Price: Rs 1,192
Why Buy: Cummins India is India’s leading manufacturer of diesel/natural gas engines for power generation, industrial and automotive markets. It is a 51 per cent subsidiary of Cummins Inc. Cummins leads the medium-high HP diesel engines business in India with manufacturing facilities in Pune and Daman. YES Securities believes, the uptick expected in the overall infrastructure space and greenshoots in the mining space should drive demand for the company’s engines in our opinion.
Recommended By: Antique Stock Broking
Current Market Price: Rs 796.70
Why Buy: The brokerage house believes that the bank’s asset quality is still one of the best in the industry and provides an attractive entry point at current levels. A research report by the brokerage house said, “The share price of YES Bank can touch Rs 985 in the next few quarters.”
Recommended By: Prabhudas Lilladher
Current Market Price: Rs 1,223
Why Buy: As the company largely depends on medium & heavy-commercial-vehicles in its India operations, demand improvement in the segment would benefit Bharat Forge. Outlook continues to appear brighter for the company as commercial vehicles demand recovers through 2015-16. Additional positives are favourable currency, a better product mix and commodity cost reduction. Receipt of new orders is an additional driver for both, automotive and the non‐auto businesses. While defence foray and new ventures in this segment are exciting from a long‐term perspective, it is unlikely to contribute significantly prior to 2017-18. The share price of the company can touch Rs 1,430.
Recommended By: YES Securities
Current Market Price: Rs 698
Why Buy: PI Industries focuses on agri-inputs and custom synthesis. The agri-inputs division offers plant protection products, specialty plant nutrient products and solutions while the customs synthesis division offers contract research and production of agrochemicals, intermediates and other niche fine chemicals for global innovators.
The growth in the custom synthesis division has been able to offset the impact of the vagaries in monsoons that are felt in the domestic agri-business. Steady launch of molecules in the agri business and commercialisation of early molecules in the custom synthesis business should help drive growth for PI Industries in the long term.
Ratnamani Metals and Tubes
Recommended by: Centrum Broking
Current Market Price: Rs 646.15
Why Buy: Ratnamani Metals and Tubes is a niche pipe player, manufacturing and exporting industrial steel pipes. Despite challenges in the environment, the company has been consistently growing its order book and registering growth in earnings. It has one of the highest operating margins at 18 per cent within the pipe industry. The brokerage house expect the growth momentum to improve specially from FY2017 with recovery in capex cycle.
(*Current market price as on August 14)