Midcap mania: Devarsh Vakil recommends three midcap companies to purchase and urges prudence in the face of the market sell-off

 Midcap mania: Devarsh Vakil recommends three midcap companies to purchase and urges prudence in the face of the market sell-off

The Indian stock market has been under constant selling pressure for the last six sessions, recording its longest losing run since February of this year. It seems like bears have gained control of Dalal Street.

Due to widespread selling, the leading indexes, the Sensex and Nifty 50, fell more than one percent apiece on Thursday. Thus far in October, the Nifty 50 has dropped by over 4%, with the index going below the 18,900 mark.

Larger markets are still losing a lot of money; the Nifty Midcap 100 and Smallcap 100 indexes have both dropped by up to 3%.

In addition to the ongoing Russia-Ukraine crisis, the new Middle East conflict (the Israel-Hamas War) may cause investors worldwide to become less risk-averse. The current market correction may be attributed mostly to the effect of rising bond rates on corporate profitability and equities market valuations, according to Devarsh Vakil, Deputy Head of Retail Research at HDFC Securities.

broader selloff in markets

The midcap index has lagged the Nifty 50 in the previous month, but still being up over 20% year-to-date (YTD) compared to Nifty 50's gains of over 4% over the same time. 

In the last month, the Nifty Midcap 100 index has dropped more than 6% while the Nifty has down by 4%.

Since the past Samvat, the Indian equities markets have performed very well, producing significant wealth for investors, according to Vakil. 

Despite the Nifty's meager 9% gain, the larger markets fared better. He said that the Nifty Midcap 100 and Nifty Smallcap 100 indexes increased by 26% and 28%, respectively.

According to him, small and midcap stock prices are still quite high, but investors would be drawn to businesses who are growing their profits rapidly.

"We believe that it is preferable to be safe than sorry. We would want to hold off on increasing our exposure to the small and mid-cap (smid) area until values improve and the current quarter-end results season passes. Businesses with strong profit growth and fair valuations would continue to attract investment, the speaker said.

According to him, the first indications of the earnings season indicate to a disappointment from IT service businesses, a meeting of market expectations by FMCG companies, and continued leadership by banking and financial services companies.

Opportunities-filled industries

Vakil said that he liked domestically focused enterprises and corporations in certain areas when asked about significant industries that may perform well in the future.

For the next year, Vakil remarked, "We continue to favor domestically focused businesses and favor opportunities in the sectors including Materials, Pharma, Oil & Gas, Small Finance Banks, Petrochemicals, Consumption, Power EPC, including restructuring plays."

stock purchases

Vakil recommended purchasing three midcap companies that he believes would perform well going forward and provide returns of up to 40%.

Bank of Equitas Small Finance 

The analyst recommends purchasing shares of Equitas Small Finance Bank at ₹114.6 per share, with a purchase price range of ₹85-95.

One of the biggest small financing banks in India, Equitas SFB provides a wide range of goods and services. Over the course of FY23–25E, we anticipate growing the loan book at a 27% CAGR, while NII and net profit are expected to rise at a 24% and 31% CAGR, respectively. The asset quality has significantly improved as economic activity has picked up steam and collection efficiency has increased. By the conclusion of FY25E, ROAA is predicted to increase to 2%," Vakil said.

According to him, the bank's return ratios might show a consistent upward trend due to increasing advances and limited slippages.

Alkalies & Chemicals in Gujarat

With integrated operations, Gujarat Alkalies & Chemicals Ltd. (GACL) is the second-biggest participant in the local caustic chlorine market. The company's share in the domestic Caustic Soda market is roughly 20%.

"We anticipate strong earnings growth for the company in FY25E, driven by a steady increase in caustic soda prices and lower energy costs," Vakil said.

He recommends purchasing the stock at a target price of ₹877 per share, or between ₹640 and ₹720.

Projects International Kalpataru

HDFC Securities projects CAGRs of 18%, 27%, and 36% for Kalpataru Projects International's revenue, EBITDA, and PAT for FY23–FY26. 

With a value of about 9 times FY26E EPS, the company is attractively priced compared to its Indian counterparts. A markdown like this can result from less donations coming from the India area. We think KPIL has reaffirmed its goal of growing revenue by 30% YoY, with room for improvement in its existing EPC business margin level, which is now between 8% and 8.5% thanks to its careful bidding discipline," Vakil said.

The order book was valued at ₹47,332 crores as of June 2023, showing a strong visibility of 3.3 times FY23 revenue. The company's robust bidding pipeline suggests that the prognosis for business creation is still favorable. 

His recommendation is to purchase the stock at ₹883 per share, with a price range of ₹630–7110.