These midcap stocks may offer alpha returns, says Credit Suisse; select large caps may gain value too

Financialization of savings and higher internet penetration can lead to higher retail inflows into the mid and smallcap sector going forward, while large caps may remain susceptible to foreign portfolio investor (FPI) selling.

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In the mid-cap space, select structural themes could offer better alpha-generation opportunities relative to large-cap peers in 2022

After a stellar run this year, Nifty50 is likely to deliver good returns in 2022 and 2023 as well. According to Credit Suisse, 38 out of 50 Nifty companies are likely to see Return on Equity (ROE) expansion in the next two years compared to the pre-COVID three-year average. These stocks account for around 76% of the overall Nifty Index weight. In the mid-cap space, select structural themes could offer better alpha-generation opportunities relative to large-cap peers.

Credit Suisse in its preferred Midcap stocks list included Aarti Industries, Crompton Greaves Consumer Electricals Ltd, Hindustan Aeronautics, PI Industries, Piramal Enterprises, PVR Ltd, Sunteck Realty, TeamLease Services, and Zee Entertainment Enterprises. These stocks are expected to deliver 17.3%, 29.3%, 19.6%, 16.4%, 8.7%, 14.3%, 6.8%, 20.5% and 13.5% ROE respectively by March 2023.

While it continues to avoid recommending large cap companies, it said that certain companies and sectors within the large cap offer valuation expansion potential in the foreseeable future. Infrastructure, cement and industrial companies are expected to perform better ahead of the Union Budget 2022, and given the expectation of higher GDP growth next year, domestic cyclicals including private banks and large public sector banks are some of Credit Suisse’s preferred segments. Since there is an expectation of sharp improvement in the hiring outlook in several sectors like from information technology, financial services, and wage growth next year, select auto, IT and financial companies also look positive.

For its preferred large cap stocks, Credit Suisse has picked Ambuja Cements (12.8% ROE Mar-23), Axis Bank (14.2%), Divi’s Laboratories Ltd (24.7%), Godrej Consumer Products (20.2%), Hindustan Unilever (21.6%), ICICI Bank (15.1%), Larsen & Toubro Ltd (14.8%), Mahindra & Mahindra Ltd (12.1%), RIL (9.2%), SBI Life Insurance Company (16%), State Bank of India (14.4%) and TCS (42%).

Credit Suisse said that financialization of savings and higher internet penetration can lead to higher retail inflows into the mid and smallcap sector going forward, while large caps may remain susceptible to foreign portfolio investor (FPI) selling in the near term. Additionally, after the recent correction in domestic markets, the chemical and pharma active pharmaceutical ingredient (API) sector is also expected to be back in favor in 2022. Apart from pure play developers, companies with expertise in financing developers are also likely to benefit the most next year.

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