The Indian equity market is once again showing bullishness after a volatile first half of the current calendar year (CY22). The benchmark BSE Sensex had declined by 11.8 percent in the first six months of CY22 but is now up nearly 16 percent from its June lows. The mid and small-cap stocks have witnessed even more volatility during the period. The BSE Mid-cap index is up 21 percent from its June lows. It had erased 16 percent of its market capitalisation between January and June this year.
This opens up new opportunities for domestic investors and it’s the right time to invest in quality mid-cap stocks with the potential to rise faster than the broader market.
The recent rally in the market had led to a rise in valuations such as the price-to-earnings (P/E) multiple and price-to-book value (P/B) ratio. Many stocks, however, still have attractive valuations, especially in the mid-cap space. This is likely to spark a further rally in these stocks.
Here are ten mid-cap stocks whose valuation ratios such as P/E multiple and P/B ratio are still lower than that of the Sensex but are more profitable on return on net worth (RoNW) or return on equity (RoE) basis. Higher than market RoNW translates into potentially faster growth in revenues and profits. This makes the perfect recipe for a high-performing stock.
1. Chemical and textile maker GHCL is at the top of our list. The company has reported a big rise in its revenues and profits in the last 12 months leading to a sharp rise in its stock price. The stock is up 59 percent year-to-date (YTD) but remains attractively priced with a P/E multiple of 6.7X and price to book value ratio of 1.9, much lower than Sensex P/E and P/B of 23.2X and 3.4 respectively. The company's current RoE at 27.5 percent is however higher than the index RoE of 15 percent.
2. Pune-based fertiliser and chemical maker Deepak Fertilisers & Chemicals is next on the list with current RoE of 25.3 percent and P/E multiple of 11.2X and P/B ratio of 2.8, both at a significant discount to the Sensex current valuation ratio.
3. IT product distributor and wholesaler Redington India is next on our list. The company has reported double-digit growth in earnings in FY22 and in Q1FY23 but its stock price continues to languish. The stock is up just 4.2 percent YTD. But a combination of high RoE (23.5%) and low valuation (P/E of 8.7X) could spark a rally in the stock.
4. Paper maker JK Paper is next on our list. The company’s stock price has doubled during the year so far driven by an equally big jump in its earnings in the last 12 months. The stock however remains cheap with a P/E of 10.1X, a P/B ratio of 2.4X and above average RoE of 23.4 percent.
5. Public sector rail construction company Rites Ltd comes next on our list with the latest RoE of 23.4 percent and trailing P/E multiple of 12.3X. The company has reported strong earnings growth in FY22 and Q1FY23 and the company's profit outlook for FY23 remains robust. The stock is up 31.8 percent YTD but can rally more given its low valuation and superior profitability.
6. Entertainment and broadcasting giant Sun TV Network is another potential high performer on our list.
It is attractively priced with a P/E of 11.2X and a P/B ratio of 2X despite being one of the best RoEs in the media industry at 21.7X.
7. Chemical and industrial product maker DCM Shriram is next with an RoE of 21.1 percent and a P/E multiple of 14X currently. The company reported high double-digit growth in net profit in FY22 and Q1FY23 leading to a rally in its stock price. The stock is up 52.7 per YTD and could rally more if it can sustain its earnings momentum in the rest of FY23.
8. Public sector Rashtriya Chemicals and Fertilisers (RCF) is also on our list thanks to its combination of low valuations and relatively high return on equity. The stock is trading at a P/E of 6.9X and a P/B ratio of a low 1.4X despite its current RoE of 20.5 percent. The company reported high double-digit earnings growth in FY22 and Q1FY23 leading to a rally in its stock price. The stock is up 30 percent YTD.
9. The public sector crude oil refiner Mangalore Refinery and Petrochemicals (MRPL) is next on our list. The company had gained massively from a global jump in refining margins since the beginning of this year. As a result, MRPL reported record profits in Q1FY23 which allows it to deleverage its balance sheet which would lead to a further rally in its share price. The stock is trading at a P/E of 2.2x and P/B ratio of 1.8X despite its record high RoE of 82.2 percent currently.
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10. Ahmedabad-based bulk drug maker Zydus Lifesciences is the tenth company in our list with a P/E of 8.6X - one of the lowest in the industry -- despite a relatively high RoE of 26.4 percent currently. The stock has been an underperformer in recent quarters due to its slow earnings growth. But the company has a history of faster earnings growth and a turnaround could happen anytime.
(Disclaimer: 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).