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Midcap stocks have had a dream run in the last 12-36 months as many have already doubled investors’ wealth many times over the same period.

But, most analysts are not predicting a halt in this dream run for a while till fundamentals catch up with valuations.Or in other words, the risk to reward ratio with respect to the broader market has now become slightly unfavourable.

“Over the last 12 months, midcaps have delivered 32 percent return, as against 18 percent by the Nifty. Also, over the last five years, midcaps have outperformed the Nifty by 59 percent. Midcaps now trade at a 7% premium to the Nifty on a P/E basis,”

The latest data suggests that the momentum in the midcap space might be slowing down, a sign, which most traders should not overlook. The Nifty sustained its upward momentum and delivered 3.4 percent returns in May, but midcaps underperformed.

Midcaps have underperformed the Nifty for the first time in five months, reflecting the expensive valuations in certain pockets. Midcaps are trading at 7 percent premium to large caps.

The strong inflows seen in the MFs is leading to a sharp out the performance of the small and midcaps over the large caps as the market reached a new high.

UBS in its latest report downgraded Indian market to neutral from overweight and cautioned on the midcap space. Small and midcaps as an asset class have had a sharp run-up following demonetization and the valuation gap compared to large caps is still high, even after a recent correction over the past month.

“Indian small & midcap (SMID) as an asset class may not be that exciting after their sharp run-up, especially in the near term; we continue to advocate a bottom-up approach,” Gautam Chhaochharia, Head of India Research, UBS Securities India Pvt. Ltd & Shaleen Kumar, Analyst, UBS Securities India Pvt. Ltd said in a note.

“We look for companies with strong business models and quality management, coupled with strong growth potential. We continue to test for earnings scenarios and compare with current Street forecasts to identify earnings surprise potential that is not priced in,” they said.

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We have collated a list of top 10 stocks from different brokerages with an investment horizon of 12 months.

Glenmark Pharma: BUY| Target Rs974

Prabhudas Lilladher maintains a buy rating on Glenmark Pharma with a 12-month target price of Rs 974. Glenmark’s revenue, EBITDA, and PAT declined by 7 percent, 40 percent and 7 percent compared to estimates in Q4FY17.

The domestic brokerage firm moderated its estimates on sales, EBITDA and PAT by 5 percent, 17 percent and 17 percent respectively in FY18E.

Even though it decreased its sales estimates by 4 percent, it increased EBITDA and PAT by 5 percent and 15 percent in FY19E due to expected approval of ANDA with a better profile such as limited competition, exclusivity, onco-injectable and specialty derma products.

IGL Ltd: BUY| Target Rs 1149

Prabhudas Lilladher maintains a buy rating on IGL with a 12-month target price of Rs 1149. IGL is expected to report healthy volume growth over the medium term supported by the steady private vehicle and taxi conversion.

Rising judicial activism in the light of increased pollution will make CNG the preferred fuel of choice. Meanwhile, government focus to increase PNG penetration will increase domestic PNG volumes going forward. For 9MFY17, overall volume growth is at 13 percent.

JK Lakshmi Cement: BUY| Target Rs 625

Prabhudas Lilladher maintains a buy rating on JK Lakshmi Cement with a 12-month target price of Rs 625. JK Lakshmi Cement (JKLC) is the 5th largest cement producer in North India with a ~7 percent market share in the region with a capacity of 6.6mtpa.

This backed by 1) one of the most efficient operations, 2) entry into the most profitable eastern region with a capacity of 2.7mtpa, and 3) increasing consolidation in Gujarat (~40% of its total volumes) ranks JKLC as one of our top pick in the sector with a PT of Rs625 at EV/EBITDA of 12x FY19E.

Rallis India: Accumulate| Target Rs261

Prabhudas Lilladher maintains a buy rating on Rallis India with a target price of Rs 261. The business has bounced back in FY17 for Rallis with the good spatial distribution of rainfall and encouraging sowing.

Rallis is currently in a sweet spot considering normal monsoon forecast by IMD, products launched over past 2-3 years expected to start contributing, cash‐flow of almost Rs1.2bn after taxes & regulatory charges on IKEA deal and 2 more molecules going commercial in CRAM. Rallis is expected to deliver 14 percent earnings CAGR over FY17-FY19E, stable margins at 15%+ and high RoEs in the range of 18 percent.

With no major capex pipeline, Rallis is expected to generate avg. cash profit of Rs2.5bn p.a. over FY17-FY19E. FY18 is expected to see investments of ~Rs0.5-0.8bn in CRAM business after a lull of 4-5 yrs.

Persistent Systems Ltd: BUY| Target Rs 725

Prabhudas Lilladher maintains a buy rating on Persistent Systems with a target price of Rs 725 even though its results were a mixed bag for the quarter ended March 31.

Persistent delivered 22 percent USD revenue growth for FY17 (9% organic and rest owing to IBM IoT deal and the full impact of IP acquisitions). Digital SBU (19% of total revenues) and IBM Alliance business (11% of total revenues) would remain on a strong growth path for FY18E. However, Services business is likely to remain a drag in FY18E as well and model flat YoY revenues for this SBU.

Mirza International: BUY| Target Rs 205

Centrum maintains a buy rating on Mirza International with a 12-month target price of Rs 205. Focus on domestic sales under its Red Tape brand and its recent foray into two new categories, namely the PU segment and sports shoes, has helped the company make inroads into the entire range of men’s footwear for which it can leverage its marketing and distribution reach.

“We believe domestic branded sales could account for 33 percent of its total sales by FY19E from 24 percent currently. Decreasing debt and increasing dividend payouts are positives,” said the report.

“We believe all the negatives in the export market are behind and the company would focus on US sales going ahead while implementation of GST is a positive,” it said.

Colgate Palmolive India: BUY| Target Rs 1109

Reliance Securities maintains a buy rating on Colgate Palmolive India Ltd with a 12-month target price of Rs 1109. “We expect Colgate’s growth trajectory to improve, going forward on the back of increased distribution network, GST roll-out, and higher pricing power,” said the report.

Introducing FY19E estimates for Colgate, the brokerage firm estimate net sales of Rs44.6bn and Rs50.7bn and a net profit of Rs6.7bn and Rs7.9bn in FY18E and FY19E, respectively. The stock currently trades at 34.3x based on expected FY19E EPS of Rs28.9.

Tata Chemicals: BUY| Target Rs 715

ICICI Securities maintains a buy rating on Tata Chemicals with a target price of Rs 715. Tata Chemical, a Tata group enterprise, is on a strong footing primarily tracking successful turnaround witnessed in its overseas businesses, steadily going high-margin domestic soda ash business amid pursuit of exiting subsidy linked domestic agri input business (fertilisers).

The company will also be a key beneficiary of a normal to positive monsoon season through its subsidiary i.e. Rallis India, which is present across the agri value chain viz. seeds, plant growth nutrients, agro-chemicals and organic manure.

Apollo Hospital: BUY| Target Rs 1400

ICICI Securities maintains a buy rating on Apollo Hospitals with a target price of Rs 1400. The March quarter margins were impacted by certain one-offs on account of demonetisation, VIP admission and regulation on stent pricing besides expenses at Navi Mumbai hospital, which was recently commissioned.

The new hospitals and Apollo Hospital contribute 14 percent of total revenues but are fetching EBITDA loss. However, some of the newly commissioned hospitals have achieved the BE level fairly ahead of our expectations.

This is likely to improve overall healthcare margins. “We expect the benefit of operating leverage to surpass asset addition, going ahead, which can eventually improve margins and RoCE,” said the report.

On the pharmacy front, margins have shown a substantial improvement in the last few quarters. The trend is likely to continue. The RoCE for pharmacy has also improved to 15%.

Bharat Electronics: BUY| Target Rs 204

ICICI Securities maintains a buy rating on Bharat Electronics (BEL) with a target price of Rs 204. Continuous order inflows and BEL’s track record in execution give us reasonable confidence about the continued stable performance of the company.

Accordingly, BEL is likely to deliver sales and PAT CAGR of 17.3 percent and 5.8 percent, respectively, in FY17-19E. “We re-rate the company due to improved visibility (order book to bill ~5x in FY17 from ~3x in FY15),” said the report.

Last modified on Friday, 09 June 2017

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