The mid- and smallcap segment has been under pressure over the past one and half years, however, they have shown a slight improvement in the last one month, riding on Narendra Modi's second stint as the prime minister. Nevertheless, the midcap index is still down over 2 percent in 2019 against a 10 percent rise in the benchmark index, Sensex.
But analysts now advise investors to accumulate midcap stocks in a gradual manner as the long-term investment opportunity in India remains intact. Flows into domestic mutual funds, which are a key driver of midcaps should revive now post elections, they added.
"The valuation gap between mid-caps and large-caps is down The long term economic backdrop for the Indian economy looks good, real GDP should grow at a faster pace in the long term. Indian households are also under-invested in equities and adding equities to their portfolio should help them build wealth," Anand Rathi said in a report.
Nifty Midcap index currently trades at a 19 percent discount to large-caps. Anand Rathi estimates the midcaps to be valued at 14.8X the 12-month forward earnings against 18.3X forward multiples for Nifty.
The historical trend also suggests that the broader market usually performs well in the first 12-18 months of a new government, the brokerage added.
These are the top 6 midcap picks from Anand Rathi Securities: Deepak Nitrite | Target: Rs 346 | Upside: 11 percent
According to the brokerage, quarterly results were mainly driven by a better product mix, capacity expansion and higher realisations across key products even as overall volume growth stood 11 percent YoY. The management is also pursuing to move higher up in the phenol-acetone chain gradually over the next few years to maximize the return from the phenol project. The brokerage has a 'buy' rating for this stock.
L&T Technology Services | Target: Rs 1,940 | Upside: 9 percent
The brokerage believes that L&T Technology Services has a promising deal in the pipeline for FY20 and continues to see a build up of large proposals. It has won nine multi-million dollar deals across all industry segments. The management has guided 14-16 percent growth in revenues for FY20 in dollar terms. They have a 'hold' rating for the stock.
Blue Star | Target: Rs 947 | Upside: 21 percent
Blue Star has again showcased its robust and agile business model, the brokerage said in the report.
"It is rising return on capital employed in challenging times, from 20.5 percent in FY18 to 24.9 percent in FY19, depicts its ability to deliver superior returns in FY20/FY21," it added.
Aditya Birla Fashion and Retail (ABFRL) | Target: Rs 247 | Upside: 17 percent
Anand Rathi is bullish on the stock as it expects the relentless network expansion to continue in FY20 as well.
"With the higher marketing spends, vigorous store expansions, brand extensions and product value enhancement, we expect the sales and profitability momentum to persist," it added.
Indian Hotels | Target: Rs 185 | Upside: 23 percent
The hotel industry in India has been witnessing continued growth in occupancy rates since the last few years and the average room rates (ARR) have been riding on improving trend. In FY19, industry demand growth of 3.4 percent outpaced supply growth of 2.6 percent, the brokerage said.
It has a 'buy' rating on the stock.
Finolex Cables | Target: Rs 507 | Upside: 10 percent
Strong brand equity, all-India distribution network, robust balance sheet and free-cash-flow generation are key positives for the company, Anand Rathi said in the report.
According to the brokerage, product diversification into electrical goods will provide ample growth opportunities and the huge cash balance may help to expand the company inorganically or reward shareholders.
It has a 'buy' rating on the stock.
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