As in 2015, this year too midcap and smallcap stocks are continuing to outperform benchmark indices and some of them like Sangam (India), Relaxo Footwears, FAG Bearings have caught the eye of leading brokerage houses.
Since the beginning of 2015, the BSE Sensex declined 3.42 per cent till November 2. On the other hand, the BSE Midcap and BSE Smallcap index gained 5.89 per cent and 1.85 per cent during the same period.
During the previous calendar year, Sensex, Smallcap index and Midcap index gained 29.89 per cent, 54.68 per cent and 69.23 per cent, respectively.
About the present market scenario, Nikhil Kamath, director, trading and risk, Zerodha, said, “Markets still continue to remain range bound. Earnings and the Bihar elections are important factors which could dictate short term momentum on the bourses. Not too many sectors have delivered and earnings are just not supporting the market. We can expect a significant number of downgrades to come out forthwith.”
Below are five stocks from the basket of midcap and smallcap indices on which market analysts are looking positive in the current market condition.
Recommended By: Sharekhan
Why Buy: Sangam (India) is an integrated textile player with its product portfolio ranging from yarn and fabrics to garments. It is a dominant player in the domestic dyed poly viscose (PV) yarn market (around 25 per cent share) and is growing strong in the highly fragmented polyester viscose fabric market. Sangam has reported a compounded annual growth rate (CAGR) of 11 per cent in its revenues and 25 per cent in its net profits over the last five years. In the same period, it has invested close to Rs 300 crore in capex (forward and backward integration) but reduced its debt/equity ratio to 1.43x in FY2015 from over 3.6x in FY2010 due to focus on cash inflows. The return ratios have also improved consistently with return on equity (RoE) and return on capital employed (RoCE) at over 15 per cent in FY2015 from less than 10 per cent in FY2010. The significant improvement and consistency in its financial performance is driven by its efforts to continuously move in backward-forward integration.
With an expected high double-digit steady growth rate in earnings over the next couple of years and increasing contribution from branded garments segment (B2C business), Sharekhan sees a potential for multiple re-rating of the stock and expect handsome gains over medium to long term. In the near term, the brokerage house believes that the initial success of its garmenting business and strong financial performance could provide 20-25 per cent returns over the next few months. On November 2, the share price of Sangam (India) was at Rs 249.80.
Recommended By: Sharekhan
Why Buy: In Q2FY2016, Relaxo Footwear (Relaxo)’s revenue growth of 15.7 per cent YoY was driven by both volume and premiumisation improvement in the product mix. In a muted demand environment, this double-digit growth in revenue on an increasingly higher base (Q2FY2015 revenue grew at 25.7 per cent YoY) is commendable and signifies the strong on-ground execution and brand salience efforts of the company. The growth in the revenue along with falling prices of raw materials boosted the operating profit margin by 170 basis points in Q2FY2016. Driven by a healthy operating performance and increase in the other income, the reported net earnings grew by a strong 56.2 per cent YoY. Adjusting for the one-off gain (reported in other income) on account of sale of investment in an associate company, the adjusted earnings grew by 39.2 per cent on a Y-o-Y basis.
Relaxo’s strong presence in the lucrative mid-priced footwear segment (through its top-of-the-mind recall brands like Hawaii, Flite and Sparx) along with its integrated manufacturing set-up, lean working capital requirement and vigilant management puts it in a sweet spot to cash in on the strong growth opportunity unfolding in the footwear category due to a shift from unbranded to branded products. Thus, Sharekhan is positive on the stock and believes the stock can touch Rs 635. The share price of Relaxo Foowears was at Rs 523.60 on November 2.
FAG Bearings and Timken India
Recommended By: JM Financial
Why Buy: Indian bearings sector is at the cusp of another upcycle (3rd in last 15 yrs) as JM Financial expects sector sales to double from $1.4bn to $3bn over next 5 years, led by robust growth in automotive sales, pickup in exports and moderate growth in industrial capex. The brokerage house is bullish on FAG Bearings and Timken India with 16 per cent upside in both these stocks. Share prices of FAG Bearings and Timken India were at Rs 4063.20 and Rs 592.70 on November 2.
Recommended By: Motilal Oswal
Why Buy: For the quarter ended September 30, 2015, Kitex Garments posted net profit of Rs 27.16 crore, up 40.55 per cent, against Rs 19.32 crore in the corresponding quarter a year ago. Net sales and other operating income of the company grew 4.75 per cent year-on-year (YoY) to Rs 134.25 crore. On November 2, the share price of Kitex Garments was at Rs 703.55.
Motilal Oswal expects 19 per cent revenue CAGR along with 450 basis points margin expansion over FY15-17, driving 32 per cent PAT CAGR. The brokerage house believes foray into the brand business marks Kitex’s transition from a B2B business to a B2C business, with strong room for higher markups and higher profitability per unit. Given huge scalability, strong return ratios and free cash generation, Motilal Oswal believes Kitex Garmens deserves a multiple of 26x one-year forward earnings and the share price of the company can touch Rs 950.
(Disclaimer: The stocks are recommended by the respective brokerage houses and not a recommendation from Financial Express online)