From Blue Star To Sobha, Here Are Jefferies’ 14 Mid-Cap Stock Picks

Global research firm Jefferies has advised clients to pick stocks based on the price-to-book multiple within India's broader markets.

The price-to-earnings multiple of the Nifty Midcap index has outpaced that of the benchmark Nifty 50 index, Jefferies said in its note titled Indian Midcaps—Rise Like A Phoenix, citing disruption and then a stellar recovery after the Covid-19 lockdown. While the benchmark trades at 22 times its current year earnings, the mid-cap gauge trades at 24 times.

But when compared on price-to-book, the mid-cap index still trades at a discount, it said, advising a bottom-up approach to select bets. The current price to book of the Nifty Midcap index is 2.7x as compared to the Nifty 50 index, which is at 3.1x.

The research firm expects the small and mid-cap companies it tracks to see their earnings per share grow 50% and 23% year-on-year in FY22 and FY23, respectively. “Earnings growth could be aided by a cyclical recovery in property, electrodes, autos, select industrials and healthcare stocks," the note said. It also expects the average return on equity to expand 520 basis points to 19.2% by FY23.

Jefferies cited government initiatives, housing revival, market share gains, indigenisation, new product launches and balance sheet strength as the key catalysts for the broader market. Based on these parameters, it explained why these 14 stocks are its top picks in the broader market.

Here’s Jefferies’ rationale behind its top picks in the broader market:

Crompton Greaves Consumer Electricals

• One of the best plays in the Indian fast moving electrical goods space.
• Robust financial strength and sturdy cash flows.
• Secular industry opportunity aided by demand traction from unbranded segment.
• Higher penetration and uptrading augur well for long-term prospects.

Blue Star

• A key beneficiary of increasing air conditioner penetration in India.
• Entering peak demand season in a position of strength after a 4-6% price hike recently.
• Management expressed keenness on using the production-linked incentives to improve backward integration.
• Market leader in mechanical, electrical, plumbing and firefighting business, and has presence in healthcare, pharma, food and beverages, commercial realty and hospitality.

KEI Industries

• Holistic India play given exposure to capex, consumption and engineering exports.
• Focus on expanding high-margin retail business is a positive.
• Will benefit from shift to organised players.
• Presence across 45 countries and a dealer network of over 1,600.

Supreme Industries

• Leader in Indian PVC plastic pipes, backed by a diversified portfolio.
• Now focused on delivering return on equity of more than 30%.
• Witnessed good demand from rural and tier-3 and tier-4 cities.
• Demand for housing has revived in metros as well.
• Demand for furniture and material handling products improved year-on-year.

Kajaria Ceramics

• Medium-term catalysts remain sturdy.
• Solid brand franchise, optimising mix, market share gains, focus on margins and balance sheet strength.
• Took price hike of 6-9% in bathware in January due to rising input costs.
• Target to sustain operating margin at about 20% in FY22E.
• Factoring in a possible upturn and revival in housing demand.

Ramco Cements

• Among the lowest cost producers which insulates it from pricing volatility.
• Key beneficiary of demand recovery in South India.
• Building in strong double-digit volume growth over FY22-23.
• New clinker capacity will drive volume growth.
• Potential to further market share gains, particularly in the east
• Elevated valuations justified by sharp margin improvement and growth headroom.

Oberoi Realty

• Preferred real-estate mid-cap pick.
• Benefitting from pick-up in Mumbai property market.
• Also embarking on a new launch cycle.
• Visibility on faster monetisation in the medium term.
• Can also benefit from potential increase in property prices.

Sobha

• Benefitting from upsurge in housing demand.
• New launches should help accelerate sales.
• Cheapest property stock in coverage.
• Faster sales driving higher operating cash flow and thus de-leveraging a positive.

IPCA Laboratories

• Unique in generating significant clinical data back to its India business.
• One of the handful Indian companies with positive volume growth over the last 12 months.
• Generated positive cash flow in eight out of the last 10 years.
• Trading at attractive valuations.

Max Healthcare

• Has industry leading margins despite low paying patients.
• Increasing international patient flow to further boost profitability.
• Bed capacity expansion to firmly establish leadership in North India.
• Best in class return on capital employed.
• Upcoming QIP to strengthen balance sheet and bring net-debt to Ebitda below 1.
• Trades at a 34% discount to Apollo Hospitals.

Emami

• Strong recovery in earnings growth in FY21.
• Key problem portfolios have seen good pick-up in growth.
• Expect traction to sustain and see 15% EPS CAGR over FY20-23E.
• Concerns over higher leverage at promoter and group level have reduced.
• Discount to peers likely to narrow going forward.

Bharat Forge

• U.S. colleagues have a favourable view on North American truck market after historically depressed trough.
• Expect a sharp rebound in Indian truck demand on a low base in FY22-23.
• PV business outlook improving and seeing good traction in wind and marine segments.
• Any large defence order will be a positive.

Mahanagar Gas

• Margin expansion on track led by partial pass-through of lower raw material costs.
• Sector continues to benefit from potential policy tailwinds.
• Attractive valuations and robust free cash flow yield.
• Noting upside risks to consensus estimates.

Newgen Software

• Key beneficiary of rising automation across enterprises.
• Strategy of partnering with large system integrators—or firms that bring together software and hardware products two make them work together—will aid breakthrough in mature geographies.
• Focus on annuity based revenue will provide greater revenue visibility and stability.
• Expect 16% revenue growth and 12% EPS growth over FY21-23E.