Growth potential, underperformance over the past two years, inexpensive valuations as well as low institutional ownership will work in favour of small & midcaps.
Mid-and-smallcap stocks have outperformed the benchmark Nifty50 by a wide margin so far in 2021. Experts said that this outperformance is likely to continue in the near future.
The Nifty Midcap 100 which hit a fresh record on 19 May has already rallied more than 20 percent so far in 2021, compared to an 8 percent rise seen in the Nifty50. Both mid-and-smallcap indices have more than doubled from their March 2020 lows, and many stocks have given multibagger returns.
To be sure, there could be some pain in the short term due to local lockdowns but as the economy heads towards normalcy, these stocks could see a bigger jump over a long period of time, said experts.
“Short-term corrections notwithstanding, we think small and midcaps will outperform large caps over the next 2-3 years,” said Jyotivardhan Jaipuria, Founder & Managing Director at Valentis Advisors Pvt. Ltd.
He gave four reasons for this trend.
“First, they are relatively cheaper than large caps. Secondly, mid-caps grow faster in an economic recovery that we expect over the next 2 years.
Thirdly, they have under-performed large caps over the past 3 years. Lastly, they still are relatively under-owned amongst institutional investors,” he told Moneycontrol in an interview.
FPIs ownership in the Nifty Midcap 100 is over 17 percent based on December quarter data compared to over 27 percent in the Nifty50 in the same period.
Harshad Patwardhan, CIO – Equities, Edelweiss AMC, is of the same opinion. He said continued benign monetary conditions, increased FPI interest in this segment as well as the infrastructure push by the government will benefit this segment. You can catch our D-Street Talk podcast with him here.
Patwardhan highlighted that benign monetary conditions are likely to continue which are good for small & midcaps. On the global front, FPIs are also monitoring midcaps very closely and are taking an active interest. FPIs ownership in the Nifty Midcap 100 is over 17 percent based on December quarter data.
Government structural reforms, as well as manufacturing & infra push, are some more factors highlighted by Patwardhan that will work well for the stocks in small & midcaps space.
That’s the macro picture. But which stocks in the small-and-midcap segments are likely to outperform over the medium to long term. Moneycontrol spoke to some experts who have picked a few stocks.
Divam Sharma, Co-founder of Green Portfolio Services believes that there is much value left in many small and midcap stocks and recommends the four below.
JSW Energy Ltd:
The power sector will see renewed demand from rise in manufacturing activities and consumer sentiments. Transforming portfolio into Renewable segment in line with government initiative, 100% capacity tied up with long term PPA and assured coal supply, strong balance sheet, and improving profitability with strong parent support.
Jubilant Ingrevia Ltd:
The company offers nutrition and personal care solutions along with other industrial use chemical solutions. They will benefit from the consumer sentiment, more emphasis towards healthcare and rise in manufacturing activities. Recently demerged from erstwhile Jubilant Lifesciences Ltd. Available at a PE of ~17 which is very lucrative for such a group.
The Centre will privatise discoms of UT and States will privatise in many metro cities. CESC, already manages many discoms, the most prominent being Kolkata. We think a major share of this privatisation could be won by CESC. Besides, it is available at very low PE of 6.8x (Sector P/E 18.68x) thus downside is limited.
It is into speciality chemicals, pigments, dyes, agri chemicals, and pharmaceuticals. The company also supplies to its flagship companies Aarti Industries and Aarti Drugs. It has been expanding capacity over the past few years and was recently recognised to be incentivised under the PLI scheme.
Atish Matlawala, Sr Analyst, SSJ Finance & Securities said that while the second wave has derailed the growth of mid and smallcap companies, they will bounce back stronger.
“We believe these companies will see some correction if COVID related lockdowns persist beyond the month of May, these corrections can be used to accumulate the stock,” said Matlawala. “Investors should look at companies that have a strong balance sheet in terms of leverage & working capital, good corporate governance and strong future outlook.”
He suggested the following three stocks
Relaxo Footwear Ltd.
Relaxo has increased its reach in tier-II, III & IV cities with a limited presence in metro and tier I cities. It has a strong presence in the mass and value segment, accounting for more than 65 percent of the revenue. Its operating cashflows are healthy as well, has an efficient working capital cycle, a return on capital employed of 20 percent and a debt-equity ratio of 0.1.
Dr Lal Pathlab Ltd:
Dr Lalpath lab has 216 clinical laboratories, 3,095 patient service centers, and over 6,955 pick-up points across India. It has built an established healthcare brand in diagnostic services. It looks to take advantage of this by expanding in western and southern regions by assisting and connecting satellite labs with collection centers..
Anjani Portland Cement Ltd
Anjani Portland Cement Ltd (APCL) has a production capacity to 1.2 million tonnes per annum, and a network of 1500 dealers predominantly in south India. Its integrated nature of operations with the presence of captive power plants and limestone mines adds to its strengths. The company has a strong balance sheet with zero long-term borrowings.