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7 midcaps that averted meltdown and have been on a winning spree

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NEW DELHI: Calendar 2018 has been pretty bad for the midcap pack, which has lost 12 per cent, on an average, from the January highs.

Yet, there are exceptions. Select stocks have not only managed to go unscathed in the mayhem but also added to the gains they had logged in 2017. Do they offer scope for further upside at this stage The list of these smart midcaps which have not only remained resilient but also managed to add to their gains in recent months include midcap IT firms Mphasis and LT Infotech, NBFC players Gruh Finance and Cholamandalam Investment, auto player Ashok Leyland, alcohol maker United Breweries and hotelier Indian Hotels Company, among others. Shares of Mphasis have rallied 53 per cent, in addition to the 29 per cent jump they had witnessed in calendar 2017.

LT Infotech has gone up 50 per cent this calendar after soaring 64 per cent in 2017. “Big money has actually been made in the midcap space.

By midcaps, I mean companies that are almost at or around the $1 billion market-cap mark.

For instance, LT Infotech and Mphasis.

There are a number of similar stocks beyond the top four or five in the frontline IT pack,” Dipen Sheth of HDFC Securities told ET Now. Brokerage Sharekhan is positive on LT Infotech due to strong return ratios, dividend payout policy (40 per cent of net profit in FY2018) and favourable delivery mix.

But the company’s operating cash flow to net profit declined in fourth quarter on a sequential basis due to increased receivable days.

The company management believes this will normalise after a quarter.

“We expect a 12-15 per cent upside over the next 8-12 months,” Sharekhan said in a May-end report.

HDFC Securities has a buy target of LT Infotech with a target price of Rs 1,720. In case of Mphasis, brokerages have turned a bit wary after the recent rally.

Kotak Securities has a ‘sell’ rating on the stock as it finds the valuation multiples rich given its relatively weak business profile with growth accruing from segments with low predictability. While Mphasis may continue to have healthy payout policy, given that its cash balance at Rs 2,480 crore accounts roughly for over 10 per cent of its market cap, its share is trading above the target prices set by different brokerages. NBFCs Gruh Finance and Cholamandalam Investment have been two other solid performers. There have been concerns over Cholamandalam Investment’s valuations, which are at a premium to some of the big NBFCs, but Emkay Global believes its consistently higher earnings growth and better ROEs do justify the premium. The company has de-risked its product portfolio, which has insulated it from the downcycle in commercial vehicles.

Among the CV financiers, it has the most diversified lending portfolio compared with most of it peers, the brokerage said. In case of Gruh Finance, analysts noted that the company's loan growth has slowed down meaningfully from 25 per cent two years ago. Over the past decade, the company has reported 20 per cent profit growth CAGR and 23 per cent growth in loan book annually, while maintaining non-performing assets at low levels.

The prevailing level factors in an optimistic view, say many brokerages, which have a neutral rating on the stock.

Analysts are positive on Ashok Leyland as the automaker plans to launch new products across tonnage categories – Captain 25 ton tipper, Guru 10 ton, Boss 16 ton, and 41 ton haulage. The company has patented the newly-developed 41 ton lift axle technology.

This has added payload capacity without any major change in vehicle structures.

With rising raw material prices, the company plans to hike prices to protect margins.

Axis Capital has a buy rating on the stock with a 6-9 month horizon. United Breweries is another stock analysts are positive on.

“Long-term volume and earnings growth opportunity is immense for India’s largest beer player, with strong entry barriers in the form of distribution, brewery reach, scale and brands.

The operating environment appears to be improving, indicating continuous strong earnings growth going forward,” said Motilal Oswal Securities. Indian Hotels is being seen as a key beneficiary of the ongoing turnaround in the hotel industry. Cost rationalisation and RevPAR growth are expected to drive margins in FY18-20E.

Further, divestment or turnaround of loss-making international subsidiaries and debt reduction remain key positive triggers for the stock in the long run, ICICI Securities said in a recent note.

UBS has come out with its top midcap picks that include Indian Hotels, but has several new names including the likes of MCX, Arvind and PVR, among others.




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