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Business News/ Markets / Stock Markets/  Midcap mania: Devarsh Vakil advocates caution amid market sell-off, suggests 3 midcap stocks to buy
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Midcap mania: Devarsh Vakil advocates caution amid market sell-off, suggests 3 midcap stocks to buy

The frontline indices, Sensex and Nifty 50, declined over a percent each on Thursday dragged by across the board selling. The Nifty 50 has plunged about 4% in October so far with the index falling below 18,900 level.

The Nifty Midcap 100 index has declined over 6% in the past one month as compared to Nifty’s fall of 4%.Premium
The Nifty Midcap 100 index has declined over 6% in the past one month as compared to Nifty’s fall of 4%.

Bears seem to have taken control over Dalal Street as the Indian stock market has been under persistent selling pressure since the last six sessions, witnessing the biggest losing streak since February this year.

The frontline indices, Sensex and Nifty 50, declined over a percent each on Thursday dragged by across the board selling. The Nifty 50 has plunged about 4% in October so far with the index falling below 18,900 level.

Broader markets continue to suffer heavy losses with the Nifty Midcap 100 and Smallcap 100 indices crashing up to 3% each.

“The new conflict in the Middle East (Israel-Hamas War) in addition to the existing Russia-Ukraine conflict could divert resources and attention and curb risk appetite of investors globally. Rising bond yields are impacting equity market valuations and corporate profitability and this is the primary reason behind the recent market correction," said Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities.

Also Read: Midcaps, smallcaps crash! Is the time for largecaps back?

Broader markets selloff

The midcap index, which is still up over 20% year-to-date (YTD) as against Nifty 50’s over 4% gains during the period, has underperformed frontline Nifty 50 in the last one month. 

The Nifty Midcap 100 index has declined over 6% in the past one month as compared to Nifty’s fall of 4%.

Vakil noted that the Indian equity markets have delivered a stellar performance since the last Samvat, generating substantial wealth for investors. 

Though the Nifty was just up 9%, the broader markets performed well. Nifty Smallcap 100 and Nifty Midcap 100 indices rose 28% and 26% respectively, he pointed out.

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He believes the valuations of small and midcap stocks are still not cheap, while companies with strong earnings growth would attract investors’ money.

“We think it is better to be safe than sorry. We would like to wait for valuations to become more attractive and wait for the current quarterly results season to get over before adding to exposure in small and mid (smid) cap space. Companies who exhibit superior earnings growth and are available at a reasonable valuation will keep attracting capital," he said.

He believes early signs in the earnings season suggest IT service companies have disappointed, FMCG companies have met market expectations, while Banking and Financial Services companies continue to lead.

Also Read: Adani Ent, L&T, Tata Motors among top 10 stocks that led Nifty 50's near 1,000-point fall in 6 sessions

Sectors with opportunities

When asked on key sectors that can do well going ahead, Vakil said he preferred domestic oriented businesses and companies in select sectors.

“We continue to favour domestic oriented businesses and favour opportunities in the sectors like Materials, Pharma, Oil & Gas, Small Finance Banks, Petrochemicals, Consumption, Power EPC and restructuring plays for the next year," said Vakil.

Stocks to buy

Vakil listed out three midcap stocks to buy, which he expects can do well in the future and can give up to 40% returns.

Equitas Small Finance Bank 

The analyst suggests buying Equitas Small Finance Bank shares in the range of 85-95 for a target price of 114.6 per share.

“Equitas SFB is one of the largest small finance banks in India and offers a bouquet of products and services. We have envisaged 24% CAGR in NII and 31% in net profit over FY23-25E, while the loan book is estimated to grow at 27% CAGR over the same time frame. As the collection efficiencies have improved and economic activities have picked momentum, the asset quality has seen immense improvement. ROAA is estimated to improve to 2% by the end of FY25E," Vakil said.

He believes the bank could display steady improvement in return ratios driven by growing advances and contained slippages.

Also Read: Nifty 50 sees significant correction in October; should you chase value or growth stocks in this market?

Gujarat Alkalies & Chemicals

Gujarat Alkalies & Chemicals Ltd (GACL) is the second-largest player in the domestic caustic chlorine industry with integrated operations. Company has about 20% share in the domestic Caustic Soda market.

“With steady increase in caustic soda prices and lower energy costs, we expect the company to register strong earnings growth in FY25E," Vakil said.

He suggests buying the stock around 640-720 for a target price of 877 per share.

Kalpataru Projects International

HDFC Securities expects Kalpataru Projects International’s revenue, EBITDA and PAT to grow at a CAGR of 18%, 27% and 36% over FY23-FY26. 

“The stock trades at an attractive valuation of ~9x FY26E EPS, which is at a significant discount to Indian peers. Such a discount could be due to lower contributions from the India region. We believe KPIL has reiterated its target of revenue growth by 30% YoY with a scope of improvement in its current margin level in EPC business in the range of 8%-8.5% on the back of its prudent bidding discipline," Vakil said.

As of June 2023, the order book stood at 47,332 crores indicating a robust visibility of 3.3x of FY23 revenue. The company’s healthy bidding pipeline indicates further positive outlook on the business generation. 

He advises to buy the stock in the range of 630-710 for a target price of 883 per share.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 26 Oct 2023, 04:01 PM IST
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