The market benchmarks Sensex and Nifty are trading at their all-time highs. On November 26, Sensex scaled the fresh peak of 41,120.28 while Nifty also hit its all-time high of 12,132.45.
Positive global cues, MSCI rejig, consistent buying by foreign investors and some bit of short coverings ahead of F&O expiry are the factors keeping the market in the higher territory, say experts.
Unlike the trend of the past few sessions, when the market rose due to support from select heavyweights, the market witnessed an across-the-board buying during the day.
So, what should be the trading strategy? Is it time to buy the fear in the small & mid-cap space or stay with steady large-cap stocks?
Experts are of the view that the midcaps are poised for healthy gains.
"For midcaps, the party has just started. The year 2020 will be the best year for midcaps since 2017. One should have at least 60 percent of midcap stocks in one's new portfolio. One should be looking at adding midcaps because they can be up 3 times in the next two years," said Sanjiv Bhasin, Director, IIFL Securities.
Bhasin is positive on the broader market and believes that 2020 will be a year of gains.
"Nifty may be appearing fully stretched and it may still rise for 300-500 points. Midcaps, earnings, base effect, lower cost of money, NBFCs, all bode well for 2020," he said.
Some experts say the recent correction in midcaps, which now trade at 5 percent discount to largecaps, will open a window for smart money to move into this space.
However, a prudent, stock-specific approach is required to maximise gains.
“Considering the current scenario, wherein the Indian markets are hovering near to peak levels and with economic growth slowing down, investors should maintain cautious approach,” Ajit Mishra, Vice President, Research, Religare Broking Ltd, told Moneycontrol.
Here are 10 mid and smallcap bets that look poised for healthy returns in the long-term.
Brokerage: Anand Rathi Share & Stock Brokers Century Plyboards (India) | Buy | Target price: Rs 223
The brokerage expects a 36 percent earnings CAGR over FY19-21, driven by growth and margin expansion in key segments.
Healthy FCF generation and RoE (nearing 20 percent) are other positives. "We retain our buy recommendation with a target of Rs 223 (earlier Rs 183), valuing it at 18 times FY21E P/E. Growth and margin recovery across segments are key monitories," said the brokerage.
While short-term challenges --dull demand and competition in MDF-- may be there, the structural long-term growth outlook is intact.
The brokerage expects 8 percent, 24 percent and 36 percent CAGR in consolidated revenue, EBITDA and PAT, respectively, over FY19-21. Rising input costs and currency fluctuations are the key risks for the stock.
Finolex Cables | Buy | Target price: Rs 478
At 13.5 times FY19 P/E, the brokerage finds the valuation appealing, given the cash-rich status and healthy FCF generation. However, a low 9 percent PAT CAGR over FY19-21 is a concern.
The brokerage advises investors to consider the stock from a long-term perspective. "Success in the new product lines, significant improvement in the JVs’ performances and strong earnings growth in the core business would determine a re-rating," the brokerage said.
Atul Auto | Buy | Target price: Rs 350
Atul Auto continues efforts to expand in the southern and northern parts of the country in the next two years. The brokerage expects growth through its network across the country and capacity expansion, with emphasis on the southern areas. Also, the company is set to launch BS-VI vehicles in February 2020.
The company has put up a 60,000-unit plant, which will commence operations in March 2020. This new capacity will also cater to demand in the southern and northern regions. The brokerage expects the scale-up to take 1.5 years and expects the entire 1,20,000 capacity to be available by FY22.
"These two regions account for only 25 percent of the company’s sales but have a more or less equal number of dealers. However, we believe it would be difficult to capture market share from Bajaj Auto and Piaggio. Growth, thus, may not be exponential," said the brokerage.
"After the sharp fall, the stock trades at an attractive 8.8 times FY20e PE. We expect revenue to register an 8 percent CAGR (to Rs 763 crore) and PAT to record a 7 percent CAGR (to Rs 64 crore). Given the inexpensive valuation, we see potential and upgrade our recommendation to a buy, with a target price of Rs 350. Lower-than-expected volume growth remains the key risk."
Ashoka Buildcon | Buy | Target price: Rs 185
With the rains now past, and as work gets going at the two recently appointed hybrid annuity and the recent additions, growth ahead is expected to be healthy. The balance sheet, too, is in shape to ensure growth doesn’t falter for want of funds.
Delayed appointed dates, RoW issues for TOT and the monsoon-impacted Q2, made management lower revenue guidance from 25-30 percent to 20-25 percent. Margin guidance held at 11-12.5 percent, but FY20 is expected to be better on strong Q2. Inflow guidance has been held at nearly Rs 4,000-6,000 crore, but is subject to the return of the NHAI awarding, the brokerage said.
"On the stronger-than-expected margins and shift to the new tax regime, our FY20E PAT has been raised nearly 64 percent (and nearly 33 percent for FY21) due to the low base (owing to losses in the SPVs). On the revised estimates, the stock (excluding investments) trades at PER of 7 times FY20E and 6 times FY21E, against a TP-implied exit multiple of 12 times FY21E," said the brokerage.
PNC Infratech | Buy | Target price: Rs 256
With delivery on almost all the key monitories, PNC's Q2 numbers were as inspiring as the last six, said the brokerage, adding, while inflows could have been better, the revenue assurance at this juncture warrants no concern. The expected year-end spurt in awarding keeps hopes high.
More positive is its contained net debt despite the rising scale of operations. This implies that not only is its balance sheet in shape for a scale-up but is also suited to make the most of any hybrid annuity opportunities. Proven execution capabilities, a well-rounded balance sheet (set to turn better on the Ghaziabad-Aligarh monetisation) and growth prospects are positives.
"Our FY20E earnings are nearly 12 percent higher (about 2 percent for FY21) on the slightly raised revenue estimates and the tax adjustments for the arbitration award. On our revised estimates, (excluding investments) the stock trades at PER of 8.4 times FY20E and10.3 times FY21E," said the brokerage.
Expert: Vinod Nair, Head of Research at Geojit Financial Services Transport Corporation of India | Buy | Target price: Rs 325
Transport Corporation of India is one of the largest integrated players in the organised logistics industry providing freight, supply chain, warehousing solutions and shipping services.
TCI’s Q2FY20 revenue growth was flat by 1 percent year-on-year (YoY) on account of de-growth in supply chain by 5 percent YoY, led by slowdown in the auto sector, but PAT grew by robust 29 percent YoY on account of tax cut and EBITDA margins improved by 40bps YoY to 9 percent on account of lower cost.
"Management focus on client addition in e-commerce, faster adoption of e-way bill and a gradual pick-up in the auto sector will drive growth. We reiterate our positive stance on TCI given its strong presence in warehousing space, multimodal logistics services and supply chain management. We factor earnings to grow by 14 percent CAGR over FY19-FY21E. We value TCI at P/E of 15 times with a target price of Rs 325 and maintain buy rating," said Nair.
JK Lakshmi Cement | Buy | Target price: Rs 380
JK Lakshmi Cement (JKLC) is part of JK group, mainly focused in north, west and eastern regions of India with a consolidated capacity of 13.3MT.
Q2FY20 revenue grew by 9.9 percent YoY, aided by strong growth in realisation at 13.4 percent YoY, while volume de-grew by about 3 percent YoY.
EBITDA per ton improved to Rs 722 from Rs 431 YoY, mainly supported by realisation growth while total cost increased by 7 percent YoY .
"Commissioning of the new grinding unit (Odisha 0.8MT) and 20MW thermal power plant in the east will bring cost savings, while benefit from softening of pet coke prices is expected in the coming quarters. We expect revenue and EBITDA to grow at 8 percent and 28 percent CAGR, respectively, over FY19-21E," Nair said.
JKLC’s focus is on deleveraging. However, the company is expected to announce new brownfield expansion in both north and east next year.
Suven Life Sciences | Buy | Target price: Rs 360
Suven Life Sciences is a pharmaceutical research expert that is in the business of contract research and manufacturing services (CRAMS).
Q2FY20 revenue grew by nearly 200 percent YoY on account of higher sales in CRAMS (up 186 percent) and specialty chemicals (currently 2 products).
EBITDA and PAT registered a more than 300 percent growth each YoY on account of an increase in high margin commercial CRAMS sales, lower employee cost and other expenses as a percentage of sales.
"We foresee EBITDA margin to remain higher and forecast PAT to cross Rs 200 crore in FY20. We retain the buy rating on a multiple of 20 times with a revised target price of Rs 360," said the analyst.
PVR | Buy | Target price: Rs 2,115
PVR owns and operates multiplexes across 19 states and union territories with a total of 800 screens. Major income segments for them are box office (ticket revenue), food and beverage and advertisement.
PVR’s Q2FY20 revenue grew by nearly 37 percent on a YoY basis owing to better box office and food and beverage collections.
Food and beverage spend per head grew by nearly 38 percent YoY while advertisement income rose by 16 percent YoY.
PVR will continue paying tax under the regular tax rate (34.94 percent) till the utilisation of available MAT credit is done with. "We revise upward our FY20E & FY21E EBITDA estimates by 6 percent & 10 percent, respectively, and increase the PAT estimates by 5 percent & 12 percent respectively," said the analyst.
KNR Constructions | Buy | Target price: Rs 295
KNR Constructions Ltd (KNR) is a leading EPC player, largely focusing on national and state highway projects.
Q2FY20 revenue of the company grew by 31 percent YoY due to strong execution in recently won HAM projects while EBITDA margin improved by 306bps YoY to 23 percent due to fall in sub-contracting expenses (down 69 percent YoY).
KNR received a date for three HAM projects out of five and execution is in full swing. Order book remains strong at 3.1 times TTM revenue and the total outstanding order book increased by 15 percent YoY and now stands at 6,682 crore.
To improve execution outlook, the company continues to bid for projects and expects to win projects around Rs 2,000 crore to Rs 2500 crore in FY20.
During Q2FY20, KNR received LOA for an irrigation project of Rs 850 crore. "Any turnaround in order inflow will fillip revenue guidance for FY20E. Going forward, execution may pick up as HAM projects will start to contribute to revenue and we expect revenue to grow at a CAGR of 16 percent over FY19-FY21E," said the analyst.