Midcap stocks witnessed their biggest one-day fall on Monday since February 2016 as rising concern over the interest rate hike by the Federal Reserve in the next few weeks spooked global markets. The BSE Midcap index tumbled 393.43 points, or 2.95 per cent, to 12951.89 on September 12. The index slipped 327.22 points, or 3.26 per cent, on February 11 this year. Benchmark BSE Sensex dropped by 444 points, or 1.54 per cent, to 28353.54 in yesterday’s trade.
In the BSE Midcap space, Indian Bank surged the most — 170 per cent during Feb 11 and Sept 12, followed by Biocon (up 100 per cent), Piramal Enterprises (up 99 per cent), Allahabad Bank (up 88 per cent), Bajaj Finance (up 78 per cent) and Mahindra & Mahindra Financial Services (up 76 per cent). On the other hand, GE T&D India, Torrent Power, Blue Dart Express, Apollo Hospital Enterprises and Glaxosmithkline Pharmaceuticals slipped 18 per cent, 14 per cent, 9 per cent, 8 per cent and 7 per cent, respectively, during the same period.
According to Sharekhan, domestic equity markets have soared significantly since the beginning of the ongoing financial year, and therefore valuations are not cheap anymore. On PE (price/earnings) basis, the Sensex trades at nearly 17 times one-year forward earnings estimate, which is at a premium to the long-term average PE multiples. However, on a macro-centric metric (ie Market Cap-to-GDP), the Sensex trades at a comfortable level of 0.8-0.85 times GDP. However, a strong revival of growth in the corporate earnings will be a key driver of further re-rating of the Indian markets. Liquidity alone cannot help sustain the momentum. Also, froth seems to be building up in certain pockets, especially in the mid-and small cap space.
Below are 5 midcap stocks which you can consider after the recent correction in the mid cap space:
1) YES Bank: Shares of the private sector lender have fallen over 16 per cent in the past four trading sessions till September 12. Global financial services firm Bank of America-Merrill Lynch is bullish on YES Bank shares with a target price of Rs 1590. It said, “Despite the recent deferment of capital raise, we believe, fundamentally, nothing has changed for the lender.” On Monday, shares of YES Bank were at Rs 1,205.
2) Amara Raja Batteries: Amara Raja Batteries (ARBL) is the second largest lead acid storage battery manufacturer in the country. According to Angel Broking, it has been outpacing market leader Exide (Amara Raja grew at a 24 per cent CAGR over FY2010-15 as compared to Exide’s growth of 13 per cent), leading to its market share improving from 25 per cent in FY10 to about 35 per cent currently. ARBL’s outperformance has been mainly on back of its association with global battery leader Johnson Controls Inc (which also holds 26 per cent stake in ARBL) for manufacturing ducts. For the quarter ended June 30, 2016, the company reported a net profit of Rs 130.66 crore, up 6.82 per cent, against Rs 122.32 crore in the same quarter last year. Angel Broking in a research note said, “Amara Raja has a broad OEM as well as replacement customer base. We believe the company is a high-quality stock to play the auto sector revival. We maintain our ‘Buy’ rating on the stock with a target price of Rs 1,174.”
3) Bharat Electronics: The share price of the company jumped nearly 7 per cent to Rs 1199.60 on September 12 from Rs 1122.15 on February 11. For the quarter ended June 2016, the company reported net profit of Rs 36.09 crore, down 52.94 per cent, against Rs 76.69 crore in the same quarter last year. Gross sales of Bharat Electronics dipped by 20.93 per cent year-on-year to Rs 846.73 crore for the quarter under review. Angel Broking said, “We expect Bharat Electronics to trade at a premium to its historical valuations on account of uptick in investment cycle. Current low competitive intensity which should enable the company to justifiably command scarcity premium, coupled with the fact that Bharat Electronics is the largest listed defence player, makes the stock more attractive. We maintain ‘Buy’ rating on the stock with a target price of Rs 1,414.”
4) Suzlon Energy: Since February-end, shares of the company soared nearly 28 per cent to Rs 17.25 on September 12. The scrip was trading at Rs 13.50 on February 29. According to HSBC, Suzlon Energy has cut its net debt by nearly 50 per cent from its peak and recovered margins during FY16. The global financial services company expects Suzlon to turn profitable during 2016-17 as well as regain market leadership. “We forecast Suzlon Energy to register a healthy 28 per cent Ebitda CAGR over FY16-19. Our target price of Rs 25 implies an FY18 EV/Ebitda of 11.9 times, while it is currently trading at 9.3 (adjusted for dilu) tion).”
5) Apollo Tyres: According to Sharekhan, Apollo Tyres’ domestic business is registering demand uptick, with the company clocking a double-digit volume growth in Q1FY2017. Volume growth received a boost from healthy growth in the OEM segment, which was largely driven by improved economic growth and better rural demand (due to a normal monsoon). For the quarter ended June 30, 2016, Apollo Tyres reported a net profit of Rs 314.69 crore, up 10.63 per cent, against Rs 284.45 crore in the same quarter last year. Gross sales of the company increased by 14.90 per cent year-on-year to Rs 3537.63 crore. Sharekhan expects Apollo Tyres’ topline to grow at 14 per cent annually over the next two years. The brokerage house is bullish on Apollo Tyres stocks with a target price of Rs 245.