UBS handpicks 10 midcaps that could return up to 62% in the next 1 year

The market has not been particularly nice to small and midcap stocks, as some of these counters have lost up to 90 percent value in 2018. Even though impact of Goods & Service Tax is over, a depreciating currency, higher oil (raw material) prices, rising interest rates and changing weather patterns have added to uncertainties, UBS said in a recent note.

The global investment bank hosted its 8th India Small & Midcaps Conference on June 7-8 in which some 32 companies and around 80 investors participated. “Investors at the conference said they continued to focus on buying opportunities when share prices dip,” the note co-authored by analysts Gautam Chhaochharia and Shaleen Kumar stated.

UBS said the relative valuation of small and midcaps suggest that optimism may be priced but not the uncertainties, despite the recent corrections. “The small & midcap stocks have outperformed largecaps during tightening periods, but have recently started to underperform.”

What could be raise alarms, is it view that strong domestic inflows into mutual funds may fade as demonetisation-led liquidity abates and if interest rates rise.

To beat the volatility, UBS handpicks 10 stock ideas from the midcap space which should be able to deliver 16-62 percent return:

Aegis Logistics Ltd: Target Rs 330| Return potential 34%

The management expects Haldia terminal to deliver at least 20-25 percent more than earlier guidance of 600k MT of LPG through-put volume in FY19. They were confident of demand remaining strong in North-East India.

Management believes that India’s domestic LPG production capacity peaked in FY18 and India’s incremental LPG demand in FY19 is likely to be met through imports. Management doesn’t expect domestic capacity to increase in near future.

Aegis new terminal announcement is likely to come in FY19 as it awaits commercial approval from one of its key customers, according to the management.

Visibility on new competing terminal remains low, in the view of management and they expect enough demand for one or two competing terminals to be absorbed whenever they come on stream.

Arvind: Buy| Target: Rs 515| Return potential 23%

The management expects demerger announcement in the next 1-2 months and subsequently, it will take another 1-2 months for the Apparel and Engineering businesses to be listed.

The growth momentum continued in apparel, according to the management and they expect to meet the 20-25 percent revenue growth guidance for FY19 in this segment with 50-100bp operating margin improvement.

Dr. Lal Pathlabs Ltd: Buy| Target: Rs 1150| Return potential 33%

The management reiterated its strong guidance with revenue growth of 15 percent in FY19 albeit shifted gear to volume growth with bundled tests being the key contributor. Operating leverage to sustain EBITDA margin at current level of 25% amid start-up costs for the Kolkata Lab.

Capex guidance of Rs350-400m to include only maintenance capex with network expansion plans. Kolkata Lab (2nd reference post-Delhi) became operational in Q4FY18.

The management maintains its guidance of EBITDA break-even by FY20 with a startup cost of Rs60-80m per annum. The management also expects Kolkata Lab to spread the company’s reach to the east including Nepal, Bhutan, and Bangladesh and consequently increase the company’s market share of the north-eastern belt to 25% (from 20% currently).

The Indian Hotel Company Ltd: Buy| Target: Rs 170| Return potential 23%

The management expects 4-5% average room rate (ARR) increase along with an occupancy increase of around 2% to result in Rev PAR increase of 6-7 percent in FY19. The non-negotiable customers form around 50% of Indian Hotels’ total customers and ARR increase in this segment is only 2 percent.

The management is working towards the rebranding of Ginger with the introduction of Starbucks in many locations. They will likely invest Rs2bn to open a 350-400 room Ginger Hotel near the international airport where they have a land parcel.

Equitas Holdings Ltd: Buy| Target: Rs 154.60| Return potential 62%

The company has strong distribution network and expertise in serving low-income households. UBS initiated a buy call on Equitas in January 2018, and expect a re-rating as a result of its aggressive loan book rebalancing and new product initiatives.

Kajaria Ceramics Ltd: Buy| Target Rs 655| Return potential 22%

According to management, the business environment in the tiles business seems to have stabilised, especially post the disruptions (demonetisation, GST, RERA) of the last two years. Implementation of the E-way bill under GST has led to some improvement in tax compliance in Morbi, Gujarat, though under-invoicing remains an issue.

The management expects tiles volume growth in FY19 to be higher than in FY18. At its investors’ meeting in May, the company guided for volume growth of 12-15%.

MCX: Buy| Target: Rs 1,350| Return potential 62%

Volumes have continued to show good traction coming back to predemonetisation levels. According to management, options volumes will pick up gradually as the product matures. The company expects options to contribute 15 percent of total revenues in next 3 years.

The management indicated that it does not see any major threat to liquidity from competition as the regulatory framework does not support liquidity enhancement incentives to the competition. There may be some pricing pressure due to irrational pricing and the company is prepared for it.

PVR Ltd: Buy| Target: Rs 1770| Return potential 26%

The management guided for 90 screen additions in FY19. Of these, 23 screens are rolled-over from FY18 and are awaiting licenses, around 50 screens are under fit-out and another 50-60 screens are likely to be handed over for fit-outs.

Management guided for higher screen additions in South India due to higher occupancy (around 60%) levels and similar F&B consumption to India averages. Ticket price cap in Chennai increased to Rs150 (exclusive of taxes), previously Rs120 (inclusive of taxes).

Quess Corp Ltd: Buy| Target: Rs 1400| Return potential 16%

The management is confident of around 20 percent organic revenue growth for the staffing business in next 3-5 years. For IT staffing, they expect 10-15 percent revenue growth and higher growth of around 25 percent in other segments. It also highlighted that some large contracts under discussion in the Facility Management (FM) division.

Further, they are bringing more discipline to the collection system. This could bring down Days Sales Outstanding (DSO) to 35 from the current level. Staffing business has a DSO of 12-15 days but other businesses like IT and FM have DSO of 45-60 days.

Voltas Ltd: Buy| Target: Rs 730| Return potential 39%

According to management, the air-conditioner (AC) industry declined in April due to unseasonal rain and thunderstorms in North India. Weather conditions in North India improved towards end-May and the company expects extended summers till the end of June.

According to management, the company has seen slight revenue growth in March-May. It has gained market share over the last two months as its secondary sales were less impacted than the rest of the industry, as per management.

Lower stocking by distributors (working capital lock-in because of GST) before the onset of the summer season warranted that the secondary inventory levels were not very high despite a decline in secondary/retail sales.