Midcap rally to continue in 2016, top 10 midcap stocks to bet upon

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Published: January 8, 2016 1:21:59 PM

Midcap rally is expected to continue on the back of an incremental fall in input costs and likely reduction in interest rates in 2016.

Midcap stocksThe BSE Midcap and BSE Smallcap index surged 7.43 per cent and 6.76 per cent in 2015. On the other hand, the benchmark index BSE Sensex fell 5.03 per cent during the same period. (Photo: Reuters)

Midcap stocks outperformed large and smallcap stocks in 2015 on the back of lower input cost, improvement in working capital and reduction in interest rates. The BSE Midcap and BSE Smallcap index surged 7.43 per cent and 6.76 per cent in 2015. On the other hand, the benchmark index BSE Sensex fell 5.03 per cent during the same period.

Market experts believe midcap may again outperform benchmark indices in 2016. According to ICICIdirect, this trend is expected to continue on the back of an incremental fall in input costs and likely reduction in interest rates in 2016.

G Chokkalingam, founder, Equinomics Research & Advisory said, “Midcap stocks will continue to outperform till June 2016 due to fall in crude oil prices.”

Below are 10 midcap stocks which could give lucrative return to investors in 2016.

Bajaj Finserv
Recommended By: ICICIdirect.com
Target Price: Rs 2,308
Why Buy: Bajaj Finserv, a financial conglomerate under the flagship brand of Bajaj and leadership of Sanjeev Bajaj has witnessed a sharp surge in earnings in all three key business segments. In general insurance, it is the most profitable and efficient player among competitors. Bajaj Finance, a niche consumer durable lender, reported a 4 times increase in loan book in FY11-15 and earnings surged at 38 per cent CAGR. The brokerage house expects a consolidated revenue, net profit to grow at a CAGR of 12.9 per cent and 22.9 per cent to Rs 22,996 crore and Rs 2,551 crore, respectively, over FY15-17E.

Jet Airways
Recommended By: ICICIdirect.com
Target Price: Rs 790
Why Buy: The recent sharp fall in ATF prices have provided significant room for margin expansion along with the growth opportunities for an Airline Industry. The Indian air travel market is highly under penetrated market, despite liberalising actions taken by the Government of India. India’s penetration of 80 per 1000 population is low relative to other developing markets such as Brazil, Turkey, Indonesia and China, where penetration rates are between 350/1000 and 650/1000 respectively. Considering these earnings growth lever, ICICIdirect.com expects Jet airways to gain market share along with the improved profitability over the next few years. Assuming the benefit of lower ATF prices, the brokerage house expect company’s EBITDA margin to scale up to 11.3 per cent as witnessed in FY11 from 1 per cent in FY15.

Greaves Cotton
Recommended By: ICICIdirect.com
Target Price: 180
Why Buy: Greaves Cotton (GCL) is one of the largest manufacturers of single cylinder (diesel, gasoline engines) and dual cylinder engines, which are used in running 3W vehicles and 4W small commercial vehicles (SCVs). Over the years, GCL has been able to command an overall 3W auto segment share at about 35 per cent in FY08-15. In the 3W goods segment (sub 1-tonne category), GCL commands a dominating position of 80-90 per cent share as market leader OEM i.e. Piaggio (single largest client of GCL) sells the highest 3W goods carrier in the domestic market. The auto segment constitutes 60 per cent of overall revenues. The revenues of the auto segment is expected to grow on the back of signing of new OEM in the 4W SCV and improved demand from Tata Motors. The brokerage house expects revenues to grow at a CAGR of 12 per cent in FY15-17E. Hence, the company’s consolidated net revenues for FY16E and FY17E are at Rs 1785 crore and Rs 2,116 crore, respectively.

Dewan Housing Finance Corporation
Recommended By: SMC Investments and Advisors
Target Price: Rs 294
Why Buy: The company offers a range of home loan products. The loan portfolio of the company increased 26 per cent yoy to Rs 56,312 crore at end September 2015 from Rs 44,742 crore at end September 2014. The AUM of the company has touched Rs 62,837 crore at end September 2015, while the company expects to cross AUM level of Rs 1 lakh crore by end March 2018.

The company continues to perform well on growth and asset quality front. While margins have inched up, Ratings upgrade coupled with reduction in base/wholesale rates are likely to aid margins.

Sintex Industries
Recommended By: SMC Investments and Advisors
Target Price: Rs 131
Why Buy: Sintex is a dominant player in the plastics and textile business segments. The Government’s emphasis on cleanliness has emerged as an important business driver for financial and overall growth of the Company. Demand for prefabricated structures has driven by the government’s Swaach Bharat initiative. Besides, the positive business and consumer sentiment improved the performance of the automobile sector (four-wheelers and two-wheelers) leading to robust growth for the custom moulding business. Thus, it is expected that the stock will see a price target of Rs 131 in 8 to 10 months time frame on a current P/E of 7.80x and FY17 (E) earnings of Rs.16.75.

Amara Raja Batteries
Recommended By: Religare Securities
Target Price: Rs 1,020
Why Buy: Amara Raja Batteries is a leading manufacturer of lead acid batteries for both industrial and automotive applications in the Indian storage battery industry. The company plans Capex of Rs 600 crore for FY16E and Rs 300 crore for FY17. The demand in industrial segment is strong and growth in the replacement market augurs well for the company. Strong auto sales also support replacement demand for batteries. The company has big expansion plans and is entering new verticals and geographies translating into quicker growth. Looking to the strong demand Religare believes that the company will continue to show its strong financial performance in the near future.

DB Corp
Recommended By: SMC Investments and Advisors
Target Price: Rs 439
Why Buy: Business fundamentals of the company continue to be strong and the management is confident of its business strategies that have positioned it as India’s largest print media company amongst national dailies. Thus, it is expected that the stock will see a price target of Rs 439 in 8 to 10 months time frame on a three year average P/E of 19.87x and FY17 (E) earnings of Rs.22.07.

Capital First
Recommended By: IndiaNivesh Securities
Target Price: Rs 413
Why Buy: The company has emerged as a specialised player in financing MSMEs by offering different products for various financing needs. Assets under Management of Capital First has grown at a CAGR of 44 per cent over FY11-15 and performance towards retail loan assets has grown 15 times since FY11 which is one of the best in the industry. With such a strong foundation, the company is well set to maintain current growth momentum in the coming years. The management continued to deliver robust result quarter over quarter. IndiaNivesh Securities is positive on the company’s long term future prospects.

VA Tech Wabag
Recommended By: ICICIdirect.com
Target Price: Rs 830
Why Buy: VA Tech Wabag (Wabag) is a leading MNC in the water treatment space (water desalination, sewage water treatment, waste water treatment, etc), with a global presence.Wabag expects to maintain its low D/E ratio factoring in its asset light business model that would continue to provide positive FCF (average FCF of Rs 150 crore in FY15-17E). The management has maintained its guidance of 20 per cent growth across order intake and revenue for FY16E. Furthermore, robust order intake in H1FY16 will not only enhance the company’s order book position but also strengthen positive outlook on the company.

Recommended By: Sharekhan
Upside: 15-20%
Why Buy: SJVN is having a total operational power capacity of around 1,960MW, which is running successfully with more than 100 per cent plant availability factor. The company is one of the rare utility companies with net cash positive position (cash Rs 4,000 crore and debt of Rs 3,400 crore) and given the lower capex requirement in near term, it has a potential to generate healthy free cash flow, especially with the new plant which got operational from FY2015. With commencement of 412-MW plant, Sharekhan expects SJVN annual cash flow from operations to improve from around Rs 1,300-1,400 crore to around Rs 1,700 crore, which is 15 per cent of the current EV of the company. Given the utility nature of the business, the company is generating a respectable RoE of around 15 per cent at the project level and 12-13 per cent RoE at the company level. Moreover, expected 50 per cent incremental capacity (solar and wind based with short gestation period) would start throwing cash soon and continue to bolster the balance sheet.

(Disclaimer: The stocks are recommended by the respective brokerage houses and not a recommendation from Financial Express online).

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