Article

Top Mid-Cap Stocks for Investment

08 Aug 2017 Nikita Bhoota

Mid-cap stocks have given huge returns in the past few years. Nifty mid-cap50 have outperformed the benchmark index, Nifty50, in the past 5 years. Nifty mid-cap 50 gave a ~23%CAGR return vs.~15% CAGR return by Nifty50 in the last 5 years. However, midcap stocks are riskier as compared to large cap stocks because they largely depend on macro conditions and viability of less public information. Thus, it makes them more volatile when compared to large cap stocks.

Given the fact that mid-cap stocks have spiked sharply in the past 5 years and have expensive valuations, selecting the right stock for investment is a challenge.

In the month of July 2018, we had recommended following stocks with upside potential in the long-run. We continue to remain bullish on the same stocks.

Persistent Systems Ltd

PSL, a technology services company focuses on helping clients build and manage software driven businesses. Its business strategy is aligned around Digital (24% of revenues, Q4FY18), Alliance (24%), Services (46%), and Accelerite (6%). North America accounted for 81% of the revenues as on Q4FY18, while Europe, India and RoW accounted for 8%, 8% and 3% of revenues respectively. The company has a robust business model with multiple growth drivers such as Digital (EDT and IP), IBM Alliance (IoT), Services (OPD for ISVs) and Accelerite (own IPs). Its two-pronged strategy involves collaborating with ISVs and enhancing its digital products and capabilities. We expect USD revenue CAGR of ~12% over FY18‐20E driven by 29% revenue CAGR in the digital business. Growth will be supported by IoT Platform deal with IBM. Overall, we estimate revenue CAGR of 13.4% and EBITDA CAGR of 18.8% over FY18-20E aided by improving IP-led revenues. We project PAT CAGR of 18.7% over FY18-20E. We expect an upside of 13% from CMP of Rs846 over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

3,034

15.4%

323

40.4

21.0

FY19E

3,455

16.3%

383

47.9

17.7

FY20E

3,891

17.0%

455

56.9

14.9

Source: 5paisa research

CESC Ltd

CESC is a RP-Sanjiv Goenka Group company that is engaged in power generation and distribution. The company has presence in retail, BPO services, infrastructure and other businesses. CESC, a diversified conglomerate, is demerging into four different entities, which would create significant value for shareholders. CESC is likely to see revenue CAGR of 10% over FY18-20E aided by PPA opportunities for the power generation business, and Spencer adding new stores. The four new entities would be – CESC Ltd (Distribution), Haldia Energy (Generation), Spencer (Retail) and CESC Ventures. We expect PAT CAGR of 9.3% over FY18-20E respectively with an EBITDA margin of 20.6% in FY20E. We see an upside of 14% from CMP of Rs1,017 over a period of 12 months.

Year

Net Sales (Rs Cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY18

16,152

22.1

1,004

75.5

13.5

FY19E

18,421

21.2

1,117

84.0

12.1

FY20E

19,550

20.6

1,199

90.2

11.3

Source:5paisa research

IEX

IEX offers an exchange platform which facilitates the physical trading of electricity for power producers and consumers. The company is professionally managed and does not have a promoter group. It enjoys a ~95% market share in the exchange traded segment of the electricity market. Indian Energy Exchange Ltd (IEX) is a power exchange that is likely to benefit from (1) 100GW of renewable energy capacity by 2022 and (2) growing interest of Power Discoms in buying through power exchanges. We expect IEX’s trading volumes grow at CAGR of 14.9% over FY18-20E. We expect the company to report revenue CAGR of 17.4% over FY18-20E with EBITDA margins of 79.8% in FY20E. We see an upside of 12% from CMP of Rs1,741over next 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

230

80.4

132

41.8

41.7

FY19E

278

80.2

172

53.4

32.6

FY20E

317

79.8

180

57.0

30.5

Source: 5paisa research

Indian Hotels

Indian Hotels is a Tata enterprise with brands like Taj, Vivanta and Ginger Hotels. It has 165 hotels with more than 20,000 rooms (including hotels under development). IHCL had an average occupancy of 64% with RevPAR of Rs5,530 in FY18.  Indian Hotels (IHCL) has overall land bank of 759 acres out of which the management plans to utilize over 1mn square feet for expansion of existing properties. It has 75% of the current inventory under freehold / leasehold, which is expected to unlock capital through sale and lease back models or lease assets to SPVs. Overall, we expect standalone revenue CAGR of 8.5% and EBITDA margin expansion by ~290bps to 27.2% over FY18-20E, on account of rising occupancy coupled with improving average room rent. We expect standalone PAT CAGR of 28% over FY18-20E, owing to above factors, we project an upside of 40% from CMP of Rs127 over next 12 months.

Year

Net Sales (Rs Cr)

OPM (%)

Adj PAT

EPS

PE (x)

Adj P/BV

FY18

2,584

24.3

203

1.7

74.4

3.5

FY19E

2,771

24.4

245

2.1

61.7

3.3

FY20E

3,042

27.2

335

2.8

45.0

3.1

Source: 5paisa research

 

Godrej Agrovet

 

Godrej Agrovet’s leading segments - animal feed, crop protection, palm oil and dairy contributed 49%, 11%, 17% and 22% to sales respectively in FY18. The company also sells processed poultry and vegetarian products under ‘Real Good Chicken’ and ‘Yummiez’ brands respectively. Product portfolio expansion and capital efficiency coupled with an asset light business model are the key strengths of the company. Its flagship animal feed, a high return business, would gain market share through product differentiation (i.e. use of biotechnology and enzymes). In crop protection, market share expansion through products for new crops coupled with increasing geographic presence would enhance segment performance. Hike in import duty of palm oil to 44% from 30% augurs well for the company. In dairy, it plans to increase market share by increasing its presence in South India and broadening its value-added product portfolio. Overall, we expect revenue and PAT CAGR of 16% and 37% respectively over FY18-20E. We project an upside of 32% from CMP of Rs569 over next 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

5,205

8.2

251

13.5

42.0

FY19E

6,356

9.9

373

20.1

28.3

FY20E

7,293

10.5

464

25.0

22.7

Source:5paisa research


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Top Mid-Cap Stocks for Investment

08 Aug 2017 Nikita Bhoota

Mid-cap stocks have given huge returns in the past few years. Nifty mid-cap50 have outperformed the benchmark index, Nifty50, in the past 5 years. Nifty mid-cap 50 gave a ~23%CAGR return vs.~15% CAGR return by Nifty50 in the last 5 years. However, midcap stocks are riskier as compared to large cap stocks because they largely depend on macro conditions and viability of less public information. Thus, it makes them more volatile when compared to large cap stocks.

Given the fact that mid-cap stocks have spiked sharply in the past 5 years and have expensive valuations, selecting the right stock for investment is a challenge.

In the month of July 2018, we had recommended following stocks with upside potential in the long-run. We continue to remain bullish on the same stocks.

Persistent Systems Ltd

PSL, a technology services company focuses on helping clients build and manage software driven businesses. Its business strategy is aligned around Digital (24% of revenues, Q4FY18), Alliance (24%), Services (46%), and Accelerite (6%). North America accounted for 81% of the revenues as on Q4FY18, while Europe, India and RoW accounted for 8%, 8% and 3% of revenues respectively. The company has a robust business model with multiple growth drivers such as Digital (EDT and IP), IBM Alliance (IoT), Services (OPD for ISVs) and Accelerite (own IPs). Its two-pronged strategy involves collaborating with ISVs and enhancing its digital products and capabilities. We expect USD revenue CAGR of ~12% over FY18‐20E driven by 29% revenue CAGR in the digital business. Growth will be supported by IoT Platform deal with IBM. Overall, we estimate revenue CAGR of 13.4% and EBITDA CAGR of 18.8% over FY18-20E aided by improving IP-led revenues. We project PAT CAGR of 18.7% over FY18-20E. We expect an upside of 13% from CMP of Rs846 over a period of 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

3,034

15.4%

323

40.4

21.0

FY19E

3,455

16.3%

383

47.9

17.7

FY20E

3,891

17.0%

455

56.9

14.9

Source: 5paisa research

CESC Ltd

CESC is a RP-Sanjiv Goenka Group company that is engaged in power generation and distribution. The company has presence in retail, BPO services, infrastructure and other businesses. CESC, a diversified conglomerate, is demerging into four different entities, which would create significant value for shareholders. CESC is likely to see revenue CAGR of 10% over FY18-20E aided by PPA opportunities for the power generation business, and Spencer adding new stores. The four new entities would be – CESC Ltd (Distribution), Haldia Energy (Generation), Spencer (Retail) and CESC Ventures. We expect PAT CAGR of 9.3% over FY18-20E respectively with an EBITDA margin of 20.6% in FY20E. We see an upside of 14% from CMP of Rs1,017 over a period of 12 months.

Year

Net Sales (Rs Cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY18

16,152

22.1

1,004

75.5

13.5

FY19E

18,421

21.2

1,117

84.0

12.1

FY20E

19,550

20.6

1,199

90.2

11.3

Source:5paisa research

IEX

IEX offers an exchange platform which facilitates the physical trading of electricity for power producers and consumers. The company is professionally managed and does not have a promoter group. It enjoys a ~95% market share in the exchange traded segment of the electricity market. Indian Energy Exchange Ltd (IEX) is a power exchange that is likely to benefit from (1) 100GW of renewable energy capacity by 2022 and (2) growing interest of Power Discoms in buying through power exchanges. We expect IEX’s trading volumes grow at CAGR of 14.9% over FY18-20E. We expect the company to report revenue CAGR of 17.4% over FY18-20E with EBITDA margins of 79.8% in FY20E. We see an upside of 12% from CMP of Rs1,741over next 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

230

80.4

132

41.8

41.7

FY19E

278

80.2

172

53.4

32.6

FY20E

317

79.8

180

57.0

30.5

Source: 5paisa research

Indian Hotels

Indian Hotels is a Tata enterprise with brands like Taj, Vivanta and Ginger Hotels. It has 165 hotels with more than 20,000 rooms (including hotels under development). IHCL had an average occupancy of 64% with RevPAR of Rs5,530 in FY18.  Indian Hotels (IHCL) has overall land bank of 759 acres out of which the management plans to utilize over 1mn square feet for expansion of existing properties. It has 75% of the current inventory under freehold / leasehold, which is expected to unlock capital through sale and lease back models or lease assets to SPVs. Overall, we expect standalone revenue CAGR of 8.5% and EBITDA margin expansion by ~290bps to 27.2% over FY18-20E, on account of rising occupancy coupled with improving average room rent. We expect standalone PAT CAGR of 28% over FY18-20E, owing to above factors, we project an upside of 40% from CMP of Rs127 over next 12 months.

Year

Net Sales (Rs Cr)

OPM (%)

Adj PAT

EPS

PE (x)

Adj P/BV

FY18

2,584

24.3

203

1.7

74.4

3.5

FY19E

2,771

24.4

245

2.1

61.7

3.3

FY20E

3,042

27.2

335

2.8

45.0

3.1

Source: 5paisa research

 

Godrej Agrovet

 

Godrej Agrovet’s leading segments - animal feed, crop protection, palm oil and dairy contributed 49%, 11%, 17% and 22% to sales respectively in FY18. The company also sells processed poultry and vegetarian products under ‘Real Good Chicken’ and ‘Yummiez’ brands respectively. Product portfolio expansion and capital efficiency coupled with an asset light business model are the key strengths of the company. Its flagship animal feed, a high return business, would gain market share through product differentiation (i.e. use of biotechnology and enzymes). In crop protection, market share expansion through products for new crops coupled with increasing geographic presence would enhance segment performance. Hike in import duty of palm oil to 44% from 30% augurs well for the company. In dairy, it plans to increase market share by increasing its presence in South India and broadening its value-added product portfolio. Overall, we expect revenue and PAT CAGR of 16% and 37% respectively over FY18-20E. We project an upside of 32% from CMP of Rs569 over next 12 months.

Year

Net Sales (Rscr)

OPM (%)

Net Profit (Rscr)

EPS (Rs)

PE (x)

FY18

5,205

8.2

251

13.5

42.0

FY19E

6,356

9.9

373

20.1

28.3

FY20E

7,293

10.5

464

25.0

22.7

Source:5paisa research