The last two years were a roller coaster ride for investors in the stock market. Despite these conditions, midcap stocks outperformed largecaps. While Nifty 50 gave 81 per cent returns, Nifty Midcap 100 gave 126% returns in the last two years.
This shows that midcap companies are a good investment option in a bull market.
Moreover, after the market slump in 2022, many midcap stocks are trading at attractive valuations. By investing in such low-priced companies, investors can benefit from a higher margin of safety.
Here are five undervalued midcap stocks that should be on a value investor’s watchlist.
#1 Shyam Metallics & Energy
The most undervalued midcap stock on our list is Shyam Metallics & Energy, an integrated metals producer.
The company’s current P/E ratio is 5.4, while its P/B ratio is 1.8. It is trading at a much lower P/E ratio than its competitors. The average P/E of the steel industry is 16.1.
Shyam Metallics mainly manufactures long steel products and ferrous alloys. It is also present in the steel value chain by selling intermediate and final products.
The company has a diversified product portfolio, which includes long steel products, ferroalloys, sponge iron, iron pellets, structural products and wire rods.
It is one of the largest producers of ferrous alloys in India in terms of installed capacity. It has three manufacturing facilities with a total installed metallurgical capacity of 5.71 million tonnes per annum.
The company plans to increase its installed capacity to 11.6 million tonnes per annum by 2025 through organic and inorganic development.
Shyam Metallics also owns eight captive power plants that generate electricity for its manufacturing plants, giving it a cost advantage.
Over the past three years, the company’s revenue has grown at a compound annual growth rate (CAGR) of 10.8%, driven by capacity addition. Net profit has also increased by 9.8%.
In the most recent quarterly results, revenue grew 51.7% year-on-year (YoY), and net profit grew by 95.7% (YoY). The company also announced a capital expenditure of Rs 9.9 billion for 2022 and 2023, in line with its target of doubling capacity by 2025.
In the future, revenue growth in the medium term will be driven by capacity addition.
#2 Manappuram Finance
Next on our list is Manappuram Finance, India’s leading Gold Loan Non-Banking Finance Company (NBFC).
Its shares are currently trading at a P/E of 6.8, well below the industry average of 26.3.
Manappuram Finance is engaged in offering fund-based and fee-based services such as gold loan, microfinance, vehicle loan and housing loan. It also forayed into the insurance broking business.
It has a network of 4,637 branches across the country and manages assets of Rs 272 billion.
Over the last three years, Net Interest Income has grown at a CAGR of 13.2%, driven by higher disbursements. Net profit also grew at a CAGR of 22% on account of lower borrowing cost.
In the most recent quarterly results, net interest income declined marginally by 12.3 per cent. Net profit also declined by 46% on account of higher provisions. However, consolidated assets under management (AUM) grew 10% annually.
The company aims to increase its profits by reducing its operating costs and increasing its collection efficiency.
CESC, third on our list, is the flagship company of the RP-Sanjiv Goenka Group.
The stock’s P/E ratio currently stands at 8.2, while the P/B ratio is 2.6. Its nearest rival NTPC is trading at a P/E of 9.5. In contrast, its counterpart in the industry is trading at an average P/E of 74.7.
CESC is engaged in the business of power generation and distribution to over 3.3 million customers in Kolkata, Howrah, Rajasthan, Maharashtra and Noida.
It is the only power distribution licensee in Kolkata and Howrah with a validity of 2038.
The company has 2,500 megawatts (MW) of electricity generation capacity in four power plants. It also has a renewable energy capacity of 174 MW in four wind plants and one solar plant.
The revenue of CESC has grown at a CAGR of 3.3% in the last three years. Net profit also increased 6.5%, driven by its cost-plus nature of supporting profitability.
In the most recent quarterly results, revenue and net profit increased 4.2% and 0.6%, respectively.
In the future, increased adoption of digital payments and a diverse customer base will improve the collection efficiency of the company which reflects stable cash flow.
#4 Mazagon Dock Shipbuilders
Fourth on our list is Mazagon Dock Shipbuilders, a leading shipbuilding yard in India.
The shares are currently trading at a P/E ratio of 8.8 and a P/B of 1.1. This is compared to the industry average P/E of 17.5. Mazagon Dock shares are undervalued.
It is engaged in the business of construction and repair of ships, destroyers, warships, tankers and submarines for the Indian Navy and the Indian Coast Guard.
The company has a shipbuilding capacity of 4,000 deadweight tonnage (DWT) and is expanding its capacity by building a new plant in Navi Mumbai.
Over the past three years, Mazagon Dock’s revenue has declined slightly due to the pandemic. As a result, its net profit also declined, but the company managed to achieve a net margin of 11.2% in the last fiscal.
The company’s revenue increased 6.3% in recent quarterly results. Net profit jumped 56.5% on the back of a strong order book.
In future, the company is going to benefit from its strong order book and the government’s efforts towards indigenisation.
#5 Motilal Oswal Financial Services
Last on our list is Motilal Oswal, a leading financial services provider.
The company’s shares are trading at a P/E of 9.3, which is significantly lower than the financial services industry average P/E of 26.5.
Motilal Oswal started as a broking entity and later ventured into asset management services, investment banking, private equity, margin financing, housing finance and venture capital management.
It has a network of over 2,500 business locations spread across 550 cities, serving over 1.6 million customers.
The company’s revenue has grown at a CAGR of 12.5% in the last three years. Net Profit has also grown at a healthy CAGR of 61.3%, driven by growth in its broking business.
In the most recent quarterly results, revenue increased 9.1%. However, net profit declined by 28% due to higher provisioning.
Being one of the top 10 brokers in India, the company has witnessed strong growth over the years owing to more investor participation in the market. In future, with high liquidity in the market, the company expects to grow its broking business further.
Why should you invest in undervalued midcap stocks?
Midcap stocks are the less researched stocks in the market. As a result, they are usually less owned.
Hence, they give their investors immense opportunity to unlock their value over the long term. However, they come with a certain risk associated with them. They have high growth potential, these stocks are also more volatile than largecaps.
If you are risk-averse and invest in good midcaps for the long term, there are high chances of earning promising returns.
However, before investing in undervalued midcaps, you need to examine the financials and fundamentals of each company.
Remember that investing in the right stocks is not a difficult mountain. A little caution will guide you in choosing the right stocks for your portfolio.
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)