With largecaps under pressure, the Street looks for midcap stories.
Markets love themes. And the themes keep changing, depending on a number of factors. The bull run of 2009 was dominated by the consumption theme, as Indians bought homes, cars and consumer durables like never before. In the run-up to the financial crisis, infrastructure was a big theme after the private public partnership (PPP) model came into existence. In volatile times like these, the market is yet again looking for outliers, which will deliver double-digit returns.
While many believe that having corrected from their peak in January, most largecap stocks offer great value at this point, the deteriorating macroeconomic conditions have made it apparent that the fourth quarter will see some bloodbath, as margins are under pressure and input costs have soared. That’s for the consumption story, but sectors like construction, cement, power and select metals plays too have been hit due to unprecedented changes in the business environment, poor order flow and high cost of capital.
If some brokerages are to be believed, there’s money to be made in this market too. There are plenty of companies that still have the power to price their products and enjoy decent Ebitda margins, simply because they either operate in a niche segment or are monopolies. Brokerages have already started compiling lists of such companies, which will possibly deliver double-digit returns going forward. IndiaInfoline has come out with a midcap report, where it has identified some companies that will deliver better returns than largecaps. “Macro and systemic risks have taken centre stage recently, but the exploratory study suggests serious value in successful midcap stock-picking, as return distribution has a fat right tail — the probability estimate of a less than 30 per cent annualised return is 17.9 per cent in midcaps versus 5.1 per cent in largecaps,” says the report.
Analysts believe the three crucial differentiating factors for successful stock-picking in an uncertain environment are: 1) resilient demand scenario; 2) pricing power to combat margin pressures from commodity inflation; and 3) strong competitive positioning that would allow healthy capital return ratios even in periods of vulnerability. Over the next 12 months, IIFL expects stocks like Bajaj Electricals, Bajaj Finance, Emami, Havells India and Pidilite to deliver healthy returns. ULJK Financial too believes that midcap stocks like Shriram Transport, BGR Energy Systems, Sterlite Technologies, Yes Bank, IRB Infra, IndusInd Bank and Indraprastha Gas will outperform the broad market over the next 12 months. What investors must, however, keep in mind is that these stocks are also vulnerable to sharp corrections in the markets and are less equipped to survive cyclical storms.
