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CLSA Has These 10 Mid-Cap Stocks On Its Radar

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:

Apollo Hospitals

  • 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.

Arvind

  • 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.

Godrej Properties

  • 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.

Havells

  • 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.

Jubilant FoodWorks

  • 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.

Ramco Cements

  • 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.

Prestige Estates

  • 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.

Pidilite

  • 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.

Voltas

  • 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.