Catch midcap stocks on dips; top ten stocks which can give 35% return in 1 year

NEW DELHI: Midcap stocks have been on the radar of investors so far in the year 2014 on the hopes that the newly-elected Modi government will boost growth and revive the investment cycle.

Riding the optimism, the S&P BSE Midcap index has managed to rally over 40 per cent compared over 26 per cent gain seen in the BSE Sensex so far in the year 2014.

Most of the midcap stocks have rallied ahead of fundamentals and there is strong possibility that if correction happens, it will be fiercer in small and midcap stocks rather than large caps.

But investors should use that dip to enter or accumulate quality stocks at lower levels, say analysts, considering the fact that midcaps are due for correction.

In its latest report, investment bank UBS has turned more selective on Indian midcaps and says valuations relative to large caps are now at historical highs.

The market had a dream rally in the last few days with blue chips starting to outperform and midcaps and small caps also joining the party.

"Well, there was a need for this bit of correction or consolidation which would, in fact, give the markets more strength for the events that are coming up," said Devang Mehta, Sr. VP & Head - Equity Advisory, Anand Rathi Financial Services.

"There is no need to be very bearish on the market, because we know that in the last few weeks, whenever there was a bearish undertone, the market has managed to bounce back," he added.

"So, we would be buyers on all dips in this market and ask our clients to accumulate good-quality stocks," says Mehta.

We have collated a list of ten stocks from different brokerage firms which can give up to 35 per cent return in the next 12 months:



MCX: Target price set at Rs 1050

MCX is a bottom-up idea that can continue to rerate with its change in ownership. It also has the potential for significant earnings upside if the FCRA Bill is passed.

UBS values the stock at 31x FY16E EPS, as they believe the stock will trade at premium valuations in the near to medium term. Regional exchanges are trading at 26x FY16 EPS and MCX's past peak multiple range was 35-40x. The price target is Rs1,050.00.

Voltas: Target price set at Rs 290

Voltas is a leading mechanical, electrical and plumbing (MEP) contractor in India and the Middle East. UBS expects the company to benefit from any investment-cycle improvement in these markets, especially at its retail air conditioning business. They value Voltas at 21x FY16E PE, slightly above its historical mean as they factor in cyclical recovery in the projects business and a higher share of the consumer business at around 43% of sales.

LIC housing Finance: Target price set at Rs 400

UBS believes that LIC Housing Finance is in a sweet spot on margins and expects NIMs to improve from 2.25% in FY14 to 2.74% in FY17E as (1) a decline in the interest rate would support margins given a higher proportion of fixed retail loans (at about 40%);

(2) yields would be supported by re-pricing of around 37% of loans in FY16EFY18E and an increasing proportion of higher-yielding loans;

and (3) a change in the liability mix towards cheaper non-convertible debentures (NCD) from expensive bank borrowings.

The stock is up 45% YTD. However, it is still trading at a 5% discount to its five-year average P/BV multiple. The global investment bank believes that lower interest rates will benefit LIC Housing Finance.

Britannia Industries Ltd: Target price set at Rs 1750

UBS believes that Britannia is amongst the most popular and trusted food brands in India, and one that could be easily leveraged into newer sub-sectors. They think that its four core brands - Good Day, Nutri-Choice, Bourbon, and Treat - have the potential to leverage across new categories, thereby aiding premiumisation.

UBS believes the share price will rerate based on: 1) a shift in consumer preference from mass-market to premium biscuits (Britannia's main product), yielding higher-than-sector volume growth and driving above-consensus earnings growth; and 2) the new management's focus on increasing rural penetration and upgrading products in urban markets.

Bajaj Electricals: Target price set at Rs 375

UBS likes Bajaj Electricals for its strong brands, large distribution network and strong market position in various product categories. Over the past few quarters, strong growth in the consumer business (lighting and durables) has been masked by poor E&P performance.

They expect this situation to improve from FY15 onwards. While the past two quarters’ disappointment in consumer business is a cause for worry and raised question about its brand power, "we believe it is still premature to come to such a conclusion. The stock appears, in any case, inexpensive compared with peers," it says.

Cummins India Ltd: Target price set at Rs 765

The stock is trading at 22.6xFY16E earnings. Prabhudas Lilladher has upgraded their earnings by 5% for FY15 to factor in revised guidance. Cummins continues to be the best franchise in the capital goods space.

Outlook for Cummins continues to be positive, given the strong ramp-up in exports and likely improvement in market position, post changes in emission norms. Low capitalization utilization of 50-60% also leaves upside surprise on margin once volumes improve.

UPL: Target price set at Rs 400

The stock is currently trading at 11.2x FY16E earnings, which is at a discount of 20-25% to industry average. Prabhudas Lilladher believes that sustained earnings growth combined with improved management of working capital will trigger re-rating.

Focus on gross debt reduction and maximizing shareholders’ returns (through increasing dividend, further buyback) remain a top priority for UPL.

Federal Bank: Target price set at Rs 140

Asset quality has improved on the back of sale to ARC of Rs1.4bn from fresh slippages and restructured NPAs. Bank has high SR book of over Rs5bn, which it will start providing for in Q3FY15.

With improved PPOP growth outlook coupled with better liability franchise and stable asset quality, valuations at 1.25x FY16 book remain attractive. Prabhudas Lilladher maintains a BUY with a PT of Rs140/share on 1.4x P/ABV FY16E.

Tata Chemicals: Target price set at Rs 473

With the worst over and clarity on restructuring emerging in UK/Kenya, Prabhudas Lilladher believes TCL is due for re-rating. They have been negative on TCL from the last several quarters. However, with improved visibility for overseas operations, the brokerage firm has turned constructive on the stock.

KPIT Technologies Ltd: Target price set at Rs 200

Prabhudas Lilladher expects revenue momentum to get better as project ramp-up accelerates. Moreover, higher offshoring, absorption of cost and improved profitability in SAP SBU would result in accelerated earnings momentum.

KPIT continues with its investment in S&M, which has translated into improved deal pipeline. The management was confident of a strong improvement in revenue momentum from Q2FY15. They believe that persistent margin erosion has troughed and will see improvement.

(Views and recommendations expressed in this section are the analysts’ own and do not represent those of EconomicTimes.com. Please consult your financial advisor before taking any position in the stocks mentioned.)