This is a good opportunity for long-term investors to pick quality small and midcap stocks at reasonable valuations.
After a year of strong outperformance over largecap stocks, small and midcap stocks turned laggard in March this year.
For example, the NSE Nifty Midcap 100 was down 0.54 per cent on March 24, while the Nifty Smallcap 100 ended the month logging losses to the tune of 4.42 per cent.
In contrast, the benchmark Nifty 50 index gained 1.6 per cent during the month.
The indices, however, do not tell the full story. Several small and midcap stocks are still down 15 to 25 per cent from their 52-week high despite recovery in the broader indices.
This was the worst show by the Nifty Midcap 100 and Nifty Smallcap indices over the past five months, while March was the best month for Nifty 50 in the three months.
This suggests that the incremental capital inflow into equities now favour largecaps over small and midcaps.
The selloff in the small and midcap stocks was triggered by concerns over unsustainably high valuation in the space.
The Nifty Midcap 100 is currently trading at a trailing price-to-earnings (P/E) of 32.9x, while Nifty Smallcap is trading at a trailing P/E of 25.5x; higher than the Nifty 50 current trailing P/E of 22.9x.
The midcap index price-to-book (P/B) value ratio at 4.22 is also higher than the Nifty 50 current ratio of 3.92.
However, the smallcap index P/B ratio at 3.7x is lower than that of Nifty 50. Analysts say that there is no fundamental justification for higher valuation for small and midcap stocks and correction was long overdue.
The selloff in the small and midcap stocks has led to a moderation in valuation in the segment. This is a good opportunity for long-term investors to pick quality small and midcap stocks at reasonable valuations.
Here are five small and midcap stocks that offer the best combination of strong revenue and profit growth, high return on equity, relatively low valuations, and a healthy balance sheet.
These stocks have been selected from the universe of Nifty Midcap 100 and Nifty Smallcap 100 indices.
MidCaps
NMDC
NMDC, India s largest domestic iron-ore miner, is expected to cross 40 million tonnes in production for the third year in a row in FY24, and is on track to exceed 50 million tonnes in FY25.
As crude steel capacity inches up to 300 million tonnes by FY30-31, the total demand for iron-ore is expected to touch 435 to 445 million tonnes, says Motilal Oswal Research.
NMDC, with a dominant presence in the domestic market, is well placed to capitalise on growth opportunities.
Strong operational capacity, net cash position, capacity expansion plans (100 million tonnes per annum capacity by FY30 and 10 15 per cent of revenue from non-iron ore segments like gold, magnetite and lithium mining prospects in Australia) are positives for the company, says Antique Research.
Indraprastha Gas
With the prevailing favourable gas prices, Indraprastha Gas (IGL) anticipates robust growth in the industrial volume segment, expecting a minimum growth rate of 10 per cent.
The company is actively exploring diverse marketing schemes to capitalise on this opportunity.
The company with a higher exposure to the CNG segment will benefit from the boost to volume growth, driven by favourable economics between CNG and alternative fuels and expansion of the city gas network in the new geographical areas (GAs).
HDFC Securities is positive on the company given the strong volume growth of Rs 11 per cent annually over FY24-26, robust margins and a robust portfolio of new GAs, thus ensuring volume growth visibility.
The stock is trading at a 30 per cent discount to its five-year average price to earnings multiple of 19.6x.
Power Finance Corporation
Power Finance Corporation, the government-ownedpower sector-focused lender have one of lowest valuation ratios among the large non-banking finance companies.
The stock is currently trading at a trailing price-to-earnings multiple of 6.9x and price to book value ratio of 1.4x, a deep discount to Nifty 50 current P/E multiple and P/B ratio of 22.9x and 3.92x, respectively.
The lender has reported strong earnings growth and its consolidated net profit was up 30.5 per cent year-on-year (Y-o-Y) during the trailing 12 months ending December 2023, while its gross interest income was up 13.5 per cent.
PFC owns 52.63 per cent stake in REC (formerly Rural Electrification Corporation) and accounts for nearly half of its consolidated earnings.
Brokerages remain bullish on the stock, with 27 buy calls compared to nine sell recommendations.
Ashok Leyland
The medium and heavy commercial vehicle (M&HCV) industry has witnessed strong growth over the past three years registering an 18 per cent annual increase over this period.
While some moderation is likely in the near-term, positive macros and continuing infra spends should sustain positive growth into FY25.
Within MHCVs, categories such as buses, tractor-trailers and tippers are likely to do well, says Nuvama Research.
The company is aiming for gross margin expansion by lowering raw material costs but also cost-control initiatives, value addition/value engineering and product mix improvement.
The company is focusing on regaining the market share by expanding its network, especially in the non-South regions with joint ventures such as the one with TVS Motor Company in the Delhi-National Capital Region.
LIC Housing Finance
Mortgage lender LIC Housing Finance is another low valued lender at its current share price.
The stock is currently trading at P/E multiple and P/B ratio of 6.7x and 1.1 respectively, a massive discount to the current valuation of Nifty 50 and Nifty midcap 100 index.
The stock nearly doubled between May 23 last year and February 24 this year, but is currently down 9.1 per cent from its 52-week high.
The lender has reported strong earnings growth in the recent quarters, with its net profits up 73 per cent Y-o-Y on TTM basis in December 2023, while gross interest income was up 23.8 per cent Y-o-Y during this period.
The lender faces growing competition from banks in mortgage lending but brokerages remain bullish with 19 buy calls against the three sell recommendations from analysts.
SmallCaps
Natco Pharma
Opportunity in the cancer drug, Revlimid, is playing out better than expected, evident from the massive beat in Q3 that is likely to continue till January 2026 as the firm is gearing up to supply higher volumes.
ICICI Securities is positive on Natco Pharma s near-term outlook driven by its proven R&D capabilities for the US and the improvement in the market share of the recently-launched limited-competition products.
A recovery in the domestic business on the back of new launches and incremental sales from agrochemical business are the triggers.
A strong balance sheet provides scope to pursue inorganic opportunities across markets, besides investing in CAR-T (immunotherapy), says Nuvama Research.
Balrampur Chini
Balrampur Chini Mills one of India s top sugar producers is now a value stock, thanks to its relatively low valuation and strong earnings growth in the recent quarters.
The stock is currently trading at a trailing P/E multiple of 12.6x while its P/B ratio is 2.3x, both of which are low compared to the valuation of the broader market.
There has been a sharp sell-off in Balrampur Chini and the stock is down 25 per cent from its 52-week high.
The company's net profits were up 116.7 per cent Y-o-Y during trailing 12 months ending December 2023, while its net sales were up 26.9 per cent Y-o-Y during the period.
A likely shortfall in sugar production in India during 2024-25 will keep prices high and support the company s revenues and earnings.
Brokerages remain bullish with seven buy calls on the stock compared to two sell recommendations.
Mahanagar Gas
The margin impact of the recent price cut is expected to be cushioned by the decline in the feedstock cost. Jefferies Research expects margins to remain at the upper end of the management guidance in FY25-26.
The plan of Maharashtra State Transport to add 800 new buses, higher conversion run rates of CNG and stronger price competitiveness versus alternative fuels should drive stronger volume growth, going forward.
ICICI Securities factors in a 56 per cent volume growth over the medium term, though there could be some moderation in margins over the next two to three years.
The risk-reward for the stock has turned favourable after a 20 per cent correction in the stock price and its one-year forward valuation is below the long-term average.
UTI AMC
After the recent sell-off, UTI Asset Management Company (AMC) now has one of the lowest P/E multiple and P/B ratio among the listed AMCs.
At its current stock price the stock is trading at a trailing P/E multiple of 15.2x while its P/B ratio is 2.6 currently.
The stock has witnessed a selloff in the last month and is down 15.8 per cent from its 52-week high.
The lender has reported strong earnings growth and its net profit was up 36.7 per cent Y-o-Y during the trailing 12-month ending December 2023 while its gross interest income was up 15.9 per cent Y-o-Y in the period.
Brokerages remain bullish on the stock with nine buy calls compared to three sell recommendations by analysts.
The company is trading at a discount to the current valuation of its peers such as HDFC AMC and Nippon Life AMC.
Manappuram Finance
The Kerala-based Manappuram Finance has one of the lowest P/E multiple and P/B ratio among the listed gold loan companies.
At its current share price, the stock is trading at a P/E multiple of 7.3x and price to book value ratio of 1.4, which is lower than most of its industry peers and the valuation in the broader market.
In comparison, the company s profitability and the balance sheet ratio such as return on equity at 19.3 per cent has been among the best in the industry.
The Reserve Bank of India s recent action against IIFL Finance has soured sentiment towards gold loan companies but a steady rise in the gold prices in India is a huge positive for gold loan companies.
Brokerages remain bullish on the stock with 15 buy calls compared to the two sell recommendations from analysts.
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Feature Presentation: Ashish Narsale/Rediff.com
