Coffee Day, Elgi Equipments among 12 midcap stocks to bet on now

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Updated: May 3, 2016 5:07:45 PM

Of late, the BSE Midcap index surged 4 per cent in April 2016 against 4.54 per cent gain by Sensex in the same month.

top 10 midcap stocks to buyMidcap stocks: Of late, the BSE Midcap index surged 4 per cent in April 2016 against 4.54 per cent gain by Sensex in the same month.(Photo: Reuters)

After giving phenomenal return of around 50 per cent in 2014-15 and double-digit return of nearly 14 per cent in 2013-14, the BSE Midcap index closed down 1.2 per cent for the year financial year ended March 2016. This comes with the backdrop of negative return of 10.3 per cent for Sensex in FY16 against a growth of 24.6 per cent and 18.7 per cent during 2014-15 and 2013-14 respectively.

This shows that there has been considerable outperformance of midcaps over their larger peers. Of late, the BSE Midcap index surged 4 per cent in April 2016 against 4.54 per cent gain by Sensex in the same month.

Rajesh Gupta, AVP – Research, SBICAP Securities said, “The growth in Midcap index is on account of valuation re-rating, higher earnings growth in the face of macro challenges and more widely dispersed quantum of sectors than Sensex. A look at the constituents of sector weights in the Midcap index reveals a high skew towards banks and financial companies, especially NBFCs, whereas the constituents of Sensex exhibit a skew only towards banks.”

Almost 25 per cent of total profit for BSE Midcap originates from finance companies having presence in mortgage lending, housing finance, loans against property, vehicle financing and consumer durable financing. According to market experts, their earnings growth is attributable to high growth in tier-2/3 cities, low ticket size loan helping them to manage the account well, low prepayment risk during the interest downturn, high yield on advances and lower cost of funds due to diversified liability mix.
The next contributing sector is auto and auto ancillary. They account for nearly 11 per cent of the index’s profit.

“We have seen robust volume numbers across scooters, passenger cars and HCV/MHCVs. After the general lethargy in economic activity (primarily industrial) and higher cost of funds that impacted the commercial vehicle sales in the past, the year saw robust growth. The auto ancillaries, aided by the uptick in OEMs volume, have witnessed renewed business expansion. On the other hand, the scooter and passenger car sale uptick came from resilient urban job market, lower fuel prices, affordable interest rate and uptick in general economic activities,” said Gupta.

The way forward
Domestic equity markets in 2016-17 would be driven by factors like positive global cues, earnings revival, policy reforms and macro recovery. In this scenario, market experts are bullish on midcap stocks. Anand James, chief market strategist, Geojit BNP Paribas, said, “Renewed optimism across sectors, improvement in liquidity as well as macros, are expected to make mid cap stocks attractive.”

Sahil Kapoor, chief market strategist, Edelweiss Broking said, “We expect a number of companies in this space to outperform frontline large-cap indices. Strong business performance will get support from strong inflows from domestic investors as well.”

Midcap stocks to bet upon

Elgi Equipments
Recommended By: Zerodha
Why Buy: Elgi Equipments is one of the largest air compressor manufacturers in the country. With the off take in industrial projects the demand for air compressors and allied products are likely to improve. Besides the company is cleaning up their international operations and Zerodha expects this to translate to healthier numbers.

Coffee Day
Recommended By: Zerodha
Why Buy: Clearly, Café Coffee Day is the largest coffee chain in the country and has a very strong brand recognition. Their core business is expected to do well. The stock price has declined nearly 30 per cent from its listing price, which is a great entry price from the valuation perspective. The brokerage house expects the stock price to move back to its listing price over the next 12 months, translating to a gain of nearly 40 per cent.

Dewan Housing Finance (DHFL)
Recommended By: Asit C Mehta Interrmediates
Why Buy: DHFL is the third largest housing finance company with a loan AUM of Rs 65,960 crore as of Q3FY16. It has gained a niche position for itself in providing low-ticket affordable housing loans (12.16 lakhs) to low-to-moderate income (LMI) households through its strong pan-India distribution footprint (362 branches) spread across tier II/III cities and outside the municipal limits of the metropolitan urban regions. DHFL has grown its business at CAGR of 45.4 per cent and 42.9 per cent for past 5 and 10 years, respectively. Asit C Mehta Interrmediates believes, the long-term outlook for DHFL to remain favourable, supported by government’s thrust on “Housing for All by 2022” and huge potential demand from LMI and EWS sections. One can ‘Buy’ DHFL shares with a target price of Rs 299.

MAGMA Fincorp
Recommended By: Asit C Mehta Interrmediates
Why Buy: Magma is engaged in providing diverse set of financing solutions to rural and semi-urban areas through its extensive pan-India branch network of 223 branches. Bottom-up analysis of Magma Fincorp suggests that they have been witnessing cyclical downturn in asset financing business and rising stress in rural economy due to poor rainfall from past two consecutive years and erratic weather headwinds. Going forward, the probability of above average monsoon is high coupled with increased focus on rural spending will lead to more utilisation of assets under finance. Thus, the visibility of rural economy turning around is quite evident. Asit C Mehta Interrmediates expects higher single digit loan AUM growth for Magma to Rs 21,578 crore by FY18E. The brokerage house believes Magma to be a re-rating candidate and recommend ‘Buy’ with target price of Rs 103.

PTC India Financial Services (PFS)
Recommended By: Asit C Mehta Interrmediates
Why Buy: PFS has placed itself as a niche player in the renewable energy space over the past few years. Government focus on renewable energy would boost power generation and distribution activity in the coming days. Robust growth in NII and loan book and reorganisation of poor asset in Q3 has given the room for further improvement in NIM ahead. Asit C Mehta Interrmediates has assigned a multiple of 1.5x on FY18E book value of Rs 40 to arrive at a revised price target of Rs 60.

Bharat Electronics
Recommended By: Geojit BNP Paribas Financial Services
Why Buy: Bharat Electronics is a Navaratna Enterprise having 37 per cent market share in India Defence Electronics. The current order book is robust at Rs 32,333 cr, 551 per cent up from last year. The CAGR of the company is expected to grow at 15 per cent over FY16E-FY20E. Geojit BNP Paribas has ‘Buy’ rating on Bharat Electronics shares with a target price of Rs 1,289.

Prestige Estate
Recommended By: SBICAP Securities
Why Buy: Prestige Estate is a Bangalore-based leading real estate company with presence in residential, commercial, hospitality, retail and resale and rentals segment. They have completed more than 192 projects covering over 64.12 million sqft and currently have 65 ongoing projects covering 67 million sqft. Moreover, 34 upcoming projects aggregating to 41.38 million sqft are set to be set into motion. The company has extended its presence to major cities across South India including Chennai, Hyderabad, Kochi, Mysore, Mangalore and Goa. The brokerage house believes, the company is better placed in comparison to other real estate players due to southern market’s relative stability, diversified presence, reasonable balance sheet, strong demand absorption and affordable housing segment thrust.

Recommended By: SBICAP Securities
Why Buy: GHCL is India’s third largest manufacturer of soda ash (around 5 per cent of revenue) after Nirma and TATA Chemicals with market share of nearly 23 per cent. The company also has presence in textiles with vertically integrated manufacturing facilities contributing nearly 43-44 per cent of total sales. The company has captive limestone mines and salt pans–key raw materials in soda ash manufacturing process–that ensure attractive EBITDA margins of over 35 per cent in soda ash. GHCL is looking to add another 1 lakh MT in next two years to meet the growing demand. SBICAP Securities is expecting the consolidated EBITDA to expand further given focus on extending overall value chain in textile processing. GHCL is attractively available at current price and the brokerage house likes the stock as it has generated positive free cash flows over past many years and has return on equity of over 26 per cent.

Mahindra Lifespace Developers
Recommended By: Angel Broking
Why Buy: The company has demonstrated speedier execution and sales across its projects vis-a-vis its peers. With around 7.5mn sqft of sales pipeline, there’s strong revenue visibility for FY2016-18E. The company would be minimally impacted by the Real Estate Bill, given its strong parentage and ethically implemented processes. Angel Broking maintains ‘Buy’ rating on Mahindra Lifespace Developers shares with a price target of Rs 554.

Radico Khaitan
Recommended By: Angel Broking
Why Buy: The brokerage house expects the company to perform well going forward in anticipation of easing material costs and on expectation of better price hikes. Also, with the company having reduced significant debt from its balance sheet, it would be able to report an improvement in its profitability. Hence, Angel Broking recommend a ‘Buy’ rating on the stock with a price target of Rs 156.

Jamna Auto Industries
Recommended By: Edelweiss Broking
Why Buy: After a 2-year downturn, the MHCV industry in India is registering a recovery. Jamna Auto (JAI) is the largest player in the domestic leaf spring industry with 64 per cent market share whilst several other small companies contribute to the remaining 36 per cent share. JAI is expected to be a significant beneficiary of the CV cycle recovery in India. The strategic location of its plants has helped it to manage cost efficiently by reducing freight expenses. Additionally, the company has forayed into the air suspension and lift axle segment via a technology tie-up with Ridewell, USA. Implementation of GST (Goods and Services Tax), will open up a significant aftermarket opportunity for organised suspension leaf spring manufacturers such as JAI.

Indian Terrain Fashions
Recommended By: Edelweiss Broking
Why Buy: Indian Terrain’s positioning as a men’s smart casualwear brand along with its contemporary designs and superior product quality have lent a competitive edge, reflected by a 24 per cent CAGR over FY11-15 from Rs 121 cr to Rs 290 cr. A vibrant pan-India distribution network along with focus on expanding in uncluttered Tier 2 and 3 cities has undeniably reinforced its long-term growth prospects. The brokerage house expects revenues to grow at 15 per cent CAGR over FY16-18E. A light asset model due to outsourced manufacturing has lead to high RoCE of over 20 per cent.

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