Portfolio picks: Top 10 mid & smallcap buy ideas which have fallen up to 40%

The recent carnage in the small and midcap space in 2018 has opened up value opportunities in many stocks which are now available at a discount. This was not the case in 2017 when most stocks were quoting premium valuations. The valuation quotient still remains relevant for most stocks, but a likely bounceback in earnings growth as well as an economic recovery should support the broader market in the long term.

Analysts’ advise investors to remain with quality stocks which might have fallen less in the carnage as compared to stocks whose value has eroded 50-80 percent in the past 6 months. The BSE Smallcap index might be down over 20 percent from their peak. In absolute terms, it is down 17 percent in 2018 so far. But experts were quick to add that we are not in a bear market.

“In the US, a fall of 20 percent or more from the peak is defined as a bear market. For more volatile emerging markets we should be using a higher figure like 30 percent. The mid and smallcap indices are down 16 percent and 21 percent, respectively, compared to a decline of 7 percent for the BSE 500. The decline in smallcaps is significant and painful, but I don’t think the broader market is in a bear market,” Vivek Ranjan Misra, Head-Fundamental Research, Karvy Stock Broking, said.

Analysts place emphasis on quality stocks irrespective of their valuation. So, what is a quality stock?

“Leadership in market products and strong control over niche segments/products are key for a high quality company. Management and operation skills and a stable balance sheet are added qualities of good stocks,” Vinod Nair, Head of Research, Geojit Financial Services, explained.

“Many mid and smallcaps have corrected to attractive levels. But high quality stocks and index heavyweights may not have corrected in the same fashion compared to a sale in the market. A risk is that it may happen over the medium term as the phase of consolidation develops, hence identification of a set of stocks will be very important to outperform the market in the long run,” he said.

We have collated a list of 10 such quality mid and smallcap buy ideas from different experts:

 Analyst: Vivek Ranjan Misra, Head-Fundamental Research, Karvy Stock Broking

Annual order inflows are pegged at Rs 12,000-13,000 crore for the next two years. Execution of electronic voting machines and voter verifiable paper audit trail in H1 FY18 will hold the key. In H1 FY18, its execution mix is in favour of non-defence related orders. With inflows improving, execution of defence could also witness a pick-up.

BEL has almost 40 percent market share in the defence electronics market and is available at 14 times FY20e earnings per share (EPS), lower than the 5-year average of 18 times. The price correction of almost 45 percent, which has been seen in the last 6 months due to fear of lower margins, seems overdone in our view. The stock has fallen over 40 percent in 2018.

The company has healthy demand for conductors, transformer oil, auto lubes and power cables. New initiatives like molten metal agreement, copper conductor business and harnessing business of railways would drive growth of individual segments. Passing on of increased raw material prices will margin at 7-8 percent levels. The stock has fallen nearly 19 percent in 2018.

The government’s thrust on irrigation and infrastructure development and strong global order book are key factors which are likely to act as key opportunities for the stock. Going forward, thrust on irrigation, urbanisation and infrastructure-building should support valuations. The stock has fallen nearly 38 percent in 2018.

The flagship manufacturing company of the Talbros Group was established in 1956 to manufacture automotive and industrial gaskets in collaboration with UK’s Coopers Payen. Talbros stands proud and tall as a mother brand of gaskets and heat shields, forgings, suspensions systems and anti-vibration components and hoses. Talbros Group has strong partnerships formed with global giants. Improving automotive demand, Bharat Stage VI, good order book line-up and increase in revenue visibility should act as opportunities. The stock has fallen over 15 percent in 2018.

Gujarat Mineral Development Corporation is a positive buy even at current levels on strong earning trajectory and strong operating performance. Robust demand for lignite, capacity addition and traction in power business are among key factors which should go in favour of the stock. The stock has fallen nearly 38 percent so far in 2018.

Analyst: Vinod Nair, Head of Research, Geojit Financial Services

Amara Raja Batteries (ARBL) is India’s second largest lead acid battery manufacturer and continues to be preferred supplier to original equipment manufacturers due to its excellent track record and robust capex plan. Q4 FY18 revenue grew 18 percent year-on-year, which was largely driven by strong automotive growth. We expect buoyancy in the automobile sector to continue due to capacity expansion by major OEMs owing to favourable macro opportunities.

Revenue is likely to grow at a compounded annual growth rate of 15 percent over FY18-20e due to normalisation of business in the industrial segment, higher auto sales and price hike taken to offset elevated lead prices. The stock has fallen a little over 7 percent in 2018.

Ashok Leyland (AL) is the second largest commercial vehicle manufacturer in India and is well placed to witness numerous opportunities like government spending on road infrastructure, overloading ban and strategy on defence vehicles. Q4 FY18 revenue grew 33 percent led by 15 percent YoY volume growth.

We expect the trend to continue. For the June quarter, the company registered 28 percent volume growth YoY. Strict implementation of the overloading ban and scrappage policy has created additional demand for the company as AL is the direct beneficiary.

We expect AL’s revenue to grow at 17 percent CAGR over FY18-20e, factoring in a volume growth of 13 percent and 23 percent in its medium and heavy commercial vehicles and light CV businesses. The stock is up 7 percent year-to-date but has fallen over 12 percent in the last three months.

Escorts (EL) is the third largest agricultural tractor manufacturer in India. It has a strong presence in the north and west, with an overall market share of 11 percent as on FY18. Q4 FY18 revenue grew 41 percent YoY led by a 57 percent and 49 percent growth in tractor and construction equipment vehicle sales, respectively.

A normal monsoon and more state subsidies for doubling agricultural growth will continue to drive demand for tractors. We expect revenue and the net profit to post a CAGR of 16 percent and 34 percent over FY18-20e led by robust volume growth and superior product mix. The stock is up 11 percent YTD.

Q4 FY18 profitability was impacted by higher discounts due to competition and a rise in fuel cost. The impact seen on earnings in Q4 FY18 is not likely to continue as we expect a passthrough of higher fuel cost leading to margin improvement. Considering Indigo’s fuel-efficient fleets, market leadership position, aggressive capacity addition and healthy balance sheet, we continue to maintain our positive view on the stock.

We expect earnings to grow by a healthy 20 percent CAGR over FY18-20e. The stock price has corrected 30 percent from its recent high of Rs 1,520 per share. We believe near term concerns are already factored in the stock’s price.

Dalmia Bharat (DBL) has commissioned a 9.2 MW waste heat recovery project at its Odisha plant and intends to set up 16 MW at other plants which will control its power cost going forward. It has announced a new capacity expansion plan of 8 million tonne in the eastern region at a capex of Rs 3,720 crore to be completed within 24 months post-approvals. We expect 15 percent revenue CAGR over FY18-20e supported by ramp up in new capacities along with a pick-up in demand. The stock has fallen nearly 30 percent in 2018..

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