Which mid cap and small cap stocks to invest in for expected Multi-Cap rebalancing?

best multi cap mutual funds

Mutual Funds
by Nikita Bhoota Last Updated: 2021-06-09T16:36:15+05:30

Market regulator SEBI on Friday i.e September 11, 2020 has revised asset allocation norms for multi-cap equity mutual fund schemes. According to the revised rules, multi-cap mutual funds will have to invest at least 75% of their total asset under management (AUM) in equity & equity related instruments versus the earlier threshold of 65% of the total AUM. The market regulator also mandated multi-cap funds to invest at least 25% in each small-cap, mid-cap and large-cap stocks. So, if a multi-cap scheme of a fund house has an AUM of Rs 10,000 crore, it will have to invest at least Rs 2,500 crore each in the three categories of stocks. According to earlier rule, multi-cap funds had freedom to invest across sectors and market capitalizations. SEBI has directed to abide by the revised rules by January 2021.

Data sourced from media reports shows at present the multi-cap fund (AUM of ~Rs1.5tn) holdings are tilted towards large cap stocks (~73% of AUM as of Aug-2020), So it is widely projected that the mutual funds would have to rebalance the portfolios by increasing allocation to midcap stocks (~17% of AUM as of Aug-2020) and small cap stocks (~6% of AUM as on Aug-2020). However, the clarification issued by SEBI (SEBI Clarification Circular) on Sunday evening also points out that portfolio rebalancing is one of the options available to mutual funds and the MF could consider options like merging with existing schemes. The clarification also suggests that SEBI is open to inputs from MF industry on the revised rules for multi-cap funds. 
We have shortlisted some of the 5 mid cap and small cap stocks that can benefit if the portfolio rebalancing was to happen. 

5 Mid Cap Stock Recommendations

Company Sector ~Market Cap
(Rs Cr)
EPS CAGR (%)
FY20-22E
PE FY21E
Godrej Agrovet Ltd. Agriculture 10,190 31 30.1
Coromandel International Ltd. Agriculture 23,727 14 18.7
Ashok Leyland Auto 22,853 49 NA
Kajaria Ceramics Ltd. Building Material 8,270 8 45.2
Ipca Laboratories Ltd. Healthcare 27,214 27 25.1

Source:5paisa Research, BSE

Godrej Agrovet Ltd:
Godrej Agrovet (GAVL) is a diversified, research & development-focused agri-business company. It is one of the leading companies in the animal feed business and the market leader in the oil palm plantation industry in India. Additionally, it has a sizeable presence in agri-inputs (i.e. agrochemicals), dairy products, and processed poultry.

Coromandel International Ltd.
Coromandel is the flagship company of the Murugappa Group and operates in fertilisers and other agri-input segments. It is India's second-largest producer of phosphatic fertilisers and is particularly strong in the South-Indian states of Andhra Pradesh and Telangana. Coromandel has an installed capacity of nearly 3.5m tonne of fertilisers (22% of domestic production capacity) and also operates in the agrochemical, specialty nutrient and organic compost verticals.

Ashok Leyland:
Ashok Leyland (AL), part of the Hinduja Group, is one of India's leading manufacturers of commercial vehicles such as trucks, buses, tippers, trailers and Defence vehicles. It is the second-largest player in the medium & heavy trucks segment in India, with market share of ~33%. AL is one of the leading players in heavy buses with market share of ~43%. The company also manufactures and sells engines for industrial and marine applications, spare parts and special alloy castings.

Kajaria Ceramics Ltd.
Kajaria Ceramics is the largest manufacturer of ceramic and vitrified tiles in India. The company manufactures ceramic wall & floor tiles as well as glazed & polished vitrified tiles. It has also ventured into some allied segments (like bathware, plywood); albeit, these segments are still quite small at present, in terms of contribution to revenues and profits.

Ipca Laboratories Ltd.
Ipca Labs is a fully integrated pharmaceutical company producing branded and generic formulations, APIs and intermediates. The company has a strong position in the domestic market, mainly in cardiology, pain, anti-malarial/bacterial and anti-diabetics products. The company exports to 110 countries and is the ninth-largest pharma exporter from India, in terms of volume.

5 Small Cap Stock Recommendations

Company Sector ~Market Cap
(Rs Cr)
EPS CAGR (%)
FY20-22E
PE FY21E
Kaveri Seeds Agriculture 3467 17 10.9
Quess Corp Industrials 6,470 14 33.6
Sudarshan Chemical Industries Chemicals 3,258 26 27.2
Heidelberg cement India Ltd. Cement 4,268 13 14.9
Persistent Systems Ltd. IT 8,949 23 21.4

Kaveri Seeds:
Kaveri Seeds is one of India's leading seed producers, with a broad product portfolio that includes hybrids for cotton, corn, paddy, bajra, sunflower, sorghum and various vegetables. In addition, in its Microteck division, Kaveri markets micronutrients and organic biopesticides.

Quess Corp:
Quess Corp (erstwhile IKYA Human Capital Solutions) is one of India’s leading integrated providers of business services. Quess is focussed on emerging as the preferred business function outsourcing partner for enterprise customers across a wide range of industries. Quess’ service & product offerings are currently grouped under three operating segments: Work Force Management, Operating Asset Management and Global Technology Solutions. 

Sudarshan Chemical Industries:
Sudarshan Chemical Industries (SCIL) has grown to become India’s largest and the world’s fourth-largest manufacturer of colour pigments. Its estimated market share in India stands at ~35%. The company’s product portfolio comprises organic, inorganic and effect pigments serving four main end-uses: coatings, plastics, inks and cosmetics.

Heidelberg cement India Ltd.
Heidelberg cement India Ltd (HCIL) is a subsidiary of Germany based Heidelberg Cement, the world’s third largest cement producer. HCIL’s clinker plants are located in Madhya Pradesh and Karnataka and its cement grinding units are located in Madhya Pradesh, Uttar Pradesh and Karnataka. Current cement grinding capacity of HCIL is 5.4mtpa (2.1mtpa in Damoh, 2.7mtpa in Jhansi and 0.6mtpa in Ammasandra).

Persistent Systems Ltd.
Persistent Systems is a technology services company. The company’s focus is on helping clients build and manage software-driven businesses. Its business strategy is aligned around four key areas: 1) Digital: Bringing together their technology partner ecosystem, solutions and a unique architecture to enable enterprises with digital transformation; 2) Alliance: Focus on the long-standing and multi-dimensional relationship between PSYS and IBM; 3) Services: Focus on services for software and product development including an agile and experience design; 4) Accelerite: Focus on products that include business-critical infrastructure software for enterprises, telecom operators and the public sector.

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