In terms of returns, the BSE Midcap and Smallcap indices saw a cut of 11 percent and over 14 percent so far in 2018, compared to an over 1 percent return in the Sensex.
Mid and smallcap stocks that provided handsome returns in 2017 lost some sheen in 2018 as investors lost over Rs 6 lakh crore. Aggregate market capitalisation of the BSE Smallcap and Midcap indices slipped Rs 4.6 lakh crore and Rs 1.7 lakh crore, respectively.
In terms of returns, the BSE Midcap and Smallcap indices saw a cut of 11 percent and over 14 percent so far in 2018, compared to an over 1 percent return in the Sensex.
Stocks in the midcap space that lost the most in 2018 include: Reliance Communications, Adani Power, Bank of India, Union Bank of India, Ajanta Pharma and Bharat Electronics. The same in the smallcap space include: Vakrangee, Gitanjali Gems, SRS, Electrosteel Steels, Orient Paper & Industries.
A number of factors - resignation of auditors, Securities and Exchange Board of India reclassification of mutual fund schemes and BSE’s surveillance mechanism on over 100 stocks - are weighing on BSE Mid and Smallcap stocks. Apart from that, high valuations, relentless selling by foreign institutional investors and failure of earnings to catch up are some of the key factors that led to a sharp correction in the mid and smallcap space.
The bull phase of CY17 provided an impetus for broader shares under the small and midcap segment to generate staggering returns for investors. Riding on this euphoria, many smallcap stocks that rose up to 174 percent or more recently came under selling pressure.
Mismatch between valuations and fundamentals as prime reason for the sell-off as earnings were not able to justify the valuation level’.It was also partially aided by SEBI’s reclassification of mutual fund schemes which played a role in price correction through a churning.
Correction in broader market further led to a margin call on scrips, thus denting overall market sentiment, which translated into further selling.
Going forward, investors will be better off investing in companies from the small & midcap space that are displaying earnings visibility and growth momentum.
Here is a list of ten mid- and smallcap stocks from various global brokerage firms that can return 16-71 percent in the next one year:
JSPL: Buy| Target: Rs 401| LTP: Rs 234.65| Return 71%
Citigroup maintain a buy rating on JSPL with a 12-month target of Rs 401. The steel business is doing well in Q1FY19. The Angul plant is ramping up fast which is a positive sign for the company. The Direct-reduced iron (DRI), also called sponge iron plant is likely to start in July 2018.
Coal supply situation has improved, and the company is now looking to sign short-term PPAs, said the report. Valuation with improving cash flows and EBITDA appear quite attractive.
HEG and Graphite India:
Jefferies maintain buy on HEG and Graphite India which have risen sharply in the last one year. The global investment bank has a buy rating on HEG with a target of Rs 4,400 which translates into a return of 38 percent. For Graphite, the target is set at 1275, which translates into gains of nearly 60 percent.
The demand supply tightness continues which led to higher realisations. New contracts are signed at higher prices hinting strong Q1FY19, said the global investment bank.
Jefferies remains positive on Graphite electrode sector. Both HEG and Graphite are trading at cheap valuations providing good buying opportunity to buy.
Apollo Hospitals: Buy| Target: Rs 1500| LTP: Rs 930| Return 61%
CLSA maintains a buy recommendations on Apollo Hospitals with a target price of Rs 1,500. Execution is key in FY19 for Apollo Hospitals. CLSA expects Apollo to achieve 20 percent EBITDA growth. New hospitals are also witnessing good traction.
Thermax: Buy| Target: Rs 1,350| LTP: Rs 1129| Return 20%
Deutsche Bank maintains a buy call on Thermax with a 12-month target price of Rs 1,350. The company has decided to enter new segments to devolatilise revenue.
The company is also looking to enter into process cooling, commercial sector, rooftop solar, and industrial segment. It also plans to expand rooftop solar biz to developed markets after 18-24 months.
Torrent Pharma: Buy| Target: Rs 1,610| LTP: 1,388| Return 16%
CLSA maintains a buy rating on Torrent Pharma with a target price of Rs 1,610. Strengthening of India franchise keeps us positive despite EPS cut.
The global investment bank expects to gain steam in FY19 along with its synergy with Unichem. It looks like the US sales have bottomed out, and Europe is holding strong while Brazil faces headwinds in FY19.The global investment bank retains revenue and Ebitda estimates for FY19-20CL.
Dish TV: Buy| Target: Rs 100| LTP: Rs 72.70| Return 39%
CLSA maintains a buy rating on Dish TV with a target price of Rs 100. The management reiterated merger synergy of Rs 5 billion in FY19. The global
investment bank sees 10 percent Ebitda Cagr over FY19-21 CL. However, ongoing open offer caps downside risk.
Prestige Estate: Buy| Target: 325| LTP: Rs 233.85| Return 40%
Citigroup maintains a buy rating on Prestige Estates with a target price of Rs 325. The new launches is likely to keep pace of sales going and boost revenues.
ESCORTS: Buy| Target: Rs 1,150| LTP: Rs 898.80| Return 28%
HSBC maintains a buy rating on Escorts with a 12-month target price of Rs 1,150. The growth momentum remains intact. The margins are likely to improve across all businesses, said the globel investment bank. Increasing captive financing is a key positive for Escorts.
NCC: Buy| Target: Rs 160| LTP: Rs 107.55| Return 49%
CLSA maintains a buy recommendation on NCC with a 12-month target price of Rs 160. The global investment bank sees several years of growth visibility. It has forecasted a 20 percent EPS CAGR over FY18-20. The guidance is robust with co expecting 45 percent topline growth in FY19.
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