Mid-cap and small-cap stocks have been stars of the rally on Dalal Street in the last two years. The BSE Mid-cap index for example is up 70 percent since the beginning of January 2020, beating the benchmark BSE Sensex which is up just around 46 percent during the period. This has been due to a sharp rise in the stock prices of small and mid-size companies with good growth potential.
A big rally in the last two years has resulted in a sharp rise in the stock valuation of smaller companies. And many of the smaller companies are now trading at premium valuation compared to large-cap stocks. This also shows in the valuation ratios of respective indices.
This is just a notch below the Sensex trailing P/E multiple of 28.3X and price to book value ratio of 3.7X.
While the broader market remains expensive on a historical basis that makes fresh investment riskier at current levels, there are still quite a few quality mid-cap stocks available at reasonable valuations. Here are 10 mid-cap stocks that are cheaper based on P/E multiple or price to book value compared to their valuation in February 2020 – before the break-out of the COVID19 pandemic.
1. Manappuram Finance: The Kerala based gold loan company Manappuram Finance is top in this list. The stock is currently trading at a P/E multiple of 8.1X and price to book value of 1.8x, both lower than 10.3X and 2.7X respectively at the end of February 2020. The company’s earnings per share (EPS) is up 32 percent in the last two years while its stock price remains unchanged. Its return on net worth (RoNW) at 27.7 percent is also among the best in the NBFC space.
2. Hawkins Cookers: Mumbai-based kitchen utensils and appliance major Hawkins Cooker is number two on our list. The stock is currently trading at a P/E of 34X, almost unchanged from 33X at the end of Feb-20 while price to book value (P/BV) is nearly 20 percent lower. The company is facing margin pressure due to higher metal prices but Hawkins remains one of the most recognised brands in the industry. Its RoNW at nearly 51 percent is also among the best in its peer group.
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3. Swaraj Engines: Next on our list is Punjab-based Swaraj Engines, one of the country’s top independent diesel engine makers and part of the Mahindra group. The company is currently trading at a P/E of 16.9X, down from 21X before the pandemic. The company EPS is up 74 percent in the last two years while the stock price is up only 38 percent during the period.
4. Coromandel International: This Murugappa group fertiliser and agri input maker is fourth on the list. The company’s EPS is up 43 percent in the last two years while the stock price is up only 27 percent during the period. As a result, its current P/E is only 17.5X down from 19.1X at the end of Feb-20.
5. Next on our list is Gillette India, which dominates the men’s grooming market in India. The company has faced growth headwinds in recent years leading to a sharp decline in its valuation but it continues to grow and remains the market leader. The stock is currently trading at a P/E of 57X down from 71X at the end of February 2020.
6. Alkem Laboratories: Mumbai-based pharmaceutical maker Alkem Labs also looks attractive at its valuation. The stock is currently trading at a P/E of 25X down from 28.2X at the end of Feb-2020. The company’s EPS is up 53 percent in the last two years against a 32 percent rise in its stock price during the period.
7. Electric appliance maker Orient Electric is also a value buy. The stock’s current P/E is 50X down from nearly 69X two years ago. Its EPS is up 90 percent in the last two years while its share price is up 39 percent during the period.
8. Abbott India: The Indian subsidiary of the United States-based global pharma major Abbott India is next on the list. The company’s EPS is up 21 percent in the last two years while the share price is up just 9 percent in the period. The result has been a steady decline in its P/E ratio that now stands at around 50X down from 57X two years ago.
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9. Colgate-Palmolive (India): The Indian subsidiary of US-based oral care and personal care maker Colgate-Palmolive has now become one of the cheapest FMCG companies on the bourses. The stock is now trading at a P/E multiple of 37X, down from 43X two years ago. Its EPS is up 31 percent in the last two years while its share price is up just 14 percent in the period.
10. Supreme Industries: Mumbai-based plastic products manufacturer Supreme Industries also makes it to the top ten. The stock is currently trading at a P/E of 25.1X, down from 36X at the end of February 2020. The company’s EPS is up 150 percent in the last two years while its share price has only gone up by 74 percent in the period, creating a buying opportunity for investors.
(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).
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