Equity Strategy: Mid-caps have led rebound since June

By: |
March 15, 2021 12:15 AM

A bottom-up stock selection approach recommended in SMID; FY22/23e PAT growth estimated at 50+/23% y-o-y

Top Picks are CROMPTON, BLSTR, KEII, SI, KJC, TRCL, OBER, SOBHA, IPCA, MAXHEALT, HMN, BHFC, NEWGEN & MAHGL.Top Picks are CROMPTON, BLSTR, KEII, SI, KJC, TRCL, OBER, SOBHA, IPCA, MAXHEALT, HMN, BHFC, NEWGEN & MAHGL.

Notable resumption from Jun20 led to sharp rebound in indices. While NSEMCAP PE (24x) outpaced NIFTY (22x), its P/B (2.7x) is still lower than NIFTY (3.1x). In Q3FY21, JEF SMID EPS grew by +39% y-o-y (+23% for Large-Caps). We recommend bottom-up approach in SMID – our coverage FY22/23 PAT could grow by 50%+/23% y-o-y, with average ROE uptick of +520bps over FY21-23. Top Picks are CROMPTON, BLSTR, KEII, SI, KJC, TRCL, OBER, SOBHA, IPCA, MAXHEALT, HMN, BHFC, NEWGEN & MAHGL.

Sharp rebound
Jun’20 marked business resumption in India. While the current premium of NSEMCAP PE to NIFTY is at +10%, their hist. 10-yr average PEs are broadly converging at 16x. However, NSESMCP (Smallcap) still trades at a discount to Midcaps/NIFTY (-20%/-10% resp). NIFTY/ NSEMCAP PE is at a premium of +37%/+53% vs. its 10-yr average. PE and +24%/+29% vs. 5-year average.

Midcap Index P/B still at discount
Q1 lockdown had disrupted FY21 earnings. Hence, P/B could be an apt metric to compare valuations. Interestingly, the current P/B of NSEMCAP (2.7x) trades at a discount of -14% to that of NIFTY (3.1x). From a historical view, NIFTY/NSEMCAP P/B is at a premium of +22%/+29% vs. 5-yr average.

JEF SMID performers
Within JEF SMID coverage (MCap < $4 bn), best performers have been Building Materials (KJC, SI), Electrodes (GRIL, HEG), Property (SOBHA, PEPL), Industrials (DIXON, KKC, GDPL, AZRE) while Pharma has relatively underperformed (ALPM, IPCA, FORH).

Earnings upgrade
Since Jul’20, NSESMCP earnings upgrade (+12%) outpaced that of NIFTY (+8%). Within JEF SMID coverage, max consensus FY21 EPS upgrades were seen in Building Materials (FNXP, SI, TRCL, KJC), Industrials (DIXON, CROMPTON, GDPL, KEII) and Pharma (IPCA, ALPM). Key consensus downgrades were seen in Property (PEPL, OBER, SOBHA), and Industrials (BLSTR, TMX, FNXC, AZRE).

Outlook; catalysts
We recommend a bottom-up stock picking approach in SMID. JEF SMID coverage is estimated to clock FY22/23e EPS growth of 50+%/ 23% y-o-y (+32%/ 15% y-o-y for Largecaps). Earnings growth could be aided by cyclical recovery in Property, Electrodes, Autos, select Industrials and Healthcare stocks.

Also, FY21 is a low base. Average RoE is likely to expand by +520bps to 19.2% by FY23 (14% in FY21), with better profitability. Key growth catalysts could be Govt. initiatives, housing revival, market share gains, indigenisation, new product launches and B/S strength.

Top SMID Picks: JEF Top SMID Picks are typically key sectoral players, with strong market shares, robust catalysts, good B/S and return ratios.

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