The Indian equity market is now showing weakness after one-and-a-half years of a strong rally. The benchmark BSE Sensex is down 1.6 percent during November so far. Overall, the index is down 6.3 percent from its lifetime high of 62,245 made on October 19.
The mid and small caps are however showing strength and both indices are up slightly during the month so far. The BSE Mid-cap index is up 0.9 percent month to date while the BSE Small-cap index is up 2.1 percent month to date. With this, both indices are down by around 6 percent from the lifetime high they touched on October 19.
This clearly shows that the domestic investors including small and high net worth individuals (HNIs) continue to invest in equity markets despite a slew of bearish commentary by foreign brokerages in recent weeks.
This is because foreign institutional investors (FII) largely invest in large-cap stocks and a sell-off by them has little impact on mid and small-cap stocks.
This is especially true of quality mid and small stocks with strong balance sheets and good growth prospects going forward. Here are ten quality mid and small caps that are still available at attractive valuations and have the potential to appreciate further from the current level. The list has been sourced from Equinomics Research & Advisory Services - a Mumbai based equity research firm.
(Disclaimer: Equinomics Research and its founder G Chokkalingam own shares of BSE, Nesco and Bombay Burmah.)
The stocks are not ranked in any particular order.
1. Ramco Industries: The Chennai-based company is one of the country's leading manufacturers of building products such as roofing sheets, drywalls and related products. It has shown strong revenue and profit growth in its core business in recent years. It’s also one of the holding and investment companies of the Ramco group and holds a large stake in other group companies such as The Ramco Cement and Ramco Systems. In fact, the companies' current market capitalisation is equivalent to just 45 percent of the current value of its stake in group firms.
2. KCP Ltd: The Chennai based cement maker is another value stock with a P/E multiple 7.2X and price to book value of 1.5X on a consolidated basis. While cement is its biggest segment, KCP is a diversified company with a large presence in sugar, renewable power, engineering and even hotel assets. In the past, the company suffered from a large debt burden but it has managed to bring it down to manageable levels and continue to deleverage its balance sheet.
3. D-Link India: One of the top network equipment makers in India, D-Link is the Indian subsidiary of the Taiwanese multinational of the same name. In the past, the company had fallen out of favour with investors as its revenue and profits stagnated and the company has lost market share. But it is once again growing that makes it a good bet on the growing digitisation in India in the wake of COVID19.
D-Link India’s valuation remains attractive with a P/E of 12X and a P/B ratio of 1.7X.
4. Indian Bank: The Chennai-based Indian Bank remains of the best managed public sector banks with the lowest non-performing assets among its peer group. The bank has also reported strong earnings growth in the first half of FY21. It remains a value buy with a P/E of 4X and price to book value of 0.4X currently.
5. Sanofi India: It is the Indian subsidiary of French pharmaceuticals major of the same name. With a P/E multiple of 30X, Sanofi India is currently one of the cheapest MNC pharma stocks in the market and its valuation also compares favourably even with home-grown mid-sized pharma companies.
6. Philips Carbon Black: It is one of India’s largest carbon black manufacturers.
Its revenues were up 60 percent and net profit more than doubled in H1FY22. The stock however remains a value buy with a P/E of 9X and P/B of 1.6X.
7. Bombay Burmah Trading Corporation: The Wadia group company is the promoter and the majority owner of Britannia Industries - one of India's top food companies. It also owns stakes in other group firms such as Bombay Dyeing and National Peroxide. It also has its tea and plantation business. The company is currently trading at nearly 80 percent discount to the current market value of its stake in group firms, much higher than the average holding company discount of 50 percent. This makes it a good value buy.
8. NESCO Ltd: This Mumbai company owns one of India's biggest exhibition centres in Goregoan, Mumbai. The company also has a large land bank in the city. It is highly profitable with a debt-free balance sheet. It is currently trading at a P/E multiple of around 25X and P/B of 2.7X, which is quite attractive given Nesco's finances.
9. Matrimony.com Ltd: The wedding focussed e-commerce major is one the cheapest listed e-commerce companies in the market right now. It is currently trading at a P/E of 42X and P/B of 2.9X, much lower than many of its other peers.
The company's revenues were up 20 percent year-on-year in H1FY22 while net profits were up 55 percent.
10. BSE Ltd: It owns the Bombay Stock Exchange or BSE. In the last few years, the company suffered from revenue stagnation but is back on a growth path and has diversified into commodity trading, mutual funds, energy trading and even an insurance distribution platform. It also has a big presence in GIFT City, Gandhinagar. Besides the free cash and BSE, its 20 percent stake in CDSL is worth around 80 percent of BSE current market capitalisation.
(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).