Amid a selloff in mid-caps stocks, CLSA is betting on medium-sized companies that it expects to grow on the back of strong business fundamentals.
The NSE Nifty Midcap index has fallen over 11 percent so far this year compared with a 2.6 percent rise in the NSE Nifty 50 Index.
The global brokerage now expects the valuations to normalise. And it prefers structural long-term themes such as housing, building materials and healthcare, according to a note. CLSA also sees a cyclical recovery in hotels.
Here are the 10 mid-cap stocks on CLSA’s watchlist and why:
- The stock is preferred because of strong brand equity, pan-India presence and a strong execution track record.
- The hospital has added 20 percent of its current capacity in the past 36 months, which has impacted profitability in the past few years.
- But the next few years will be about execution of new beds and consolidating its presence in key markets.
- The stock is attractive as the proposed demerger of brands and retail from the parent company should help create value.
- Value unlocking will be dependent on the B&R business being able to fund its own growth.
- Management expects all brands to exit FY19 with positive EBITDA.
- Planned capital expenditure of Rs 500 crore largely to expand garment capacities in the textiles space.
- The stock is preferred as the company is an asset-light, volume driven, residential developer.
- Ten new project launches are expected in the current financial year from five in the previous, with Bengaluru and NCR being the major markets.
- Volume driven sales strategy and a fleet-footed approach, taking advantage of affordable housing boom should be easier amongst peers.
- The stock should be considered as the acquisition of Lloyds has helped the company gain entry into the fast growing $10-billion consumer durable market.
- Havells saw strong market share gains in the fans and water heater segments.
- FY19 is expected to be a decisive year for Lloyds as it gains scale with the commissioning of a captive manufacturing facility and with footprint expansion.
- The stock is attractive as the new management has addressed several issues in the past 12 months.
- There’s an uptick in same-store sales growth, improvement in customer satisfaction scores and margin improvement over the past year.
- Strong earnings per share growth expected of over 40 percent over FY18-20.
Lemon Tree Hotels
- The stock is preferred as the company is well placed to leverage its existing market position as a leading mid-priced hotel chain.
- The company plans to expand its portfolio by 67 percent over FY18-21 to 8,152 rooms through the development or acquisition of properties and also new leases and management contracts that complement its existing geographical spread.
- The stock is attractive as the cement maker is in the midst of raising grinding capacity by nearly 3.5 million tonnes to reach 20 MT by 2020.
- Outlook is improving, as channel checks indicate demand pick-up in Tamil Nadu.
- Over the past five years, Ramco has strengthened its balance sheet, as absolute net debt has halved, with net debt to Ebitda ratio down to 1.4 times.
- The stock is preferred as the company is expanding again after two years of consolidation mode.
- Management has guided for pre-sales growth of 6 percent-21 percent in FY19, helped by 10 million square feet in new launches.
- This aggressive strategy as industry consolidation gives a rare opportunity to scale up.
- The stock should be avoided as valuation leave little room for upside. CLSA believes that competition is rising in its core category of adhesives.
- Raw material cost pressures and increasing competitive intensity should restrict EPS growth to 10 percent over FY18-20.
- The stock is not preferred as the company is rapidly shifting to inverter air conditioners from AC business, where it is not a market leader.
- The March 2018 quarter was the first one after tighter energy efficiency norms came into effect, which accelerated the shift toward inverter ACs.
- With its AC business trading at a 41 times earnings per share FY19CL, the stock is not ready for any negative surprises.