The Indian equity market has been moving in a narrow price band for more than a year now. The benchmark BSE Sensex has risen just 4 percent in the last one year and has been oscillating in a narrow band at 59,000 levels. The end of the post-Covid rally in the broader market had however been quite painful for the mid-cap and small-cap stocks. Most of the stocks in this segment are down 25-40 percent from their 52-week highs. As a result, both the BSE MId-Cap and BSE Small Cap index have underperformed the Sensex in the last one year.
For example, the BSE Mid-Cap index is almost unchanged since the end of December 2021 and has traded in a narrow band at around 25,000 levels. The BSE Small cap index on the other hand has declined by around 2 percent since the end of December 2021. The decline in many individual stocks has been much sharper and these benchmark indices appear resilient due to a good show by a few big stocks.
A poor show by the mid and small-cap stocks has however resulted in a sharp decline in the valuation of these companies. This offers an opportunity for long-term investors to pick up quality mid-cap stocks at attractive valuations.
Here are ten mid-cap stocks that are a good investment right now. These stocks offer the best combination of low valuation, high profitability and return on capital employed and a strong balance sheet.
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Many of these companies are also debt-free or have minimal debt on their balance sheets, greatly reducing the risk for investors. Besides, all these ten stocks are dividend-paying companies and that is another positive for long-term investors.
1. Public sector Petronet LNG is at the top of our list. It is India's top importer and seller of liquefied natural gas and has grown steadily in the last ten years or so. The stock is currently available at an attractive valuation with a trailing price-to-earnings multiple of 9.5X and price-to-book value of 2.3X, both a big discount to the Sensex valuation ratio. In comparison, the company reported a return on equity (RoE) of 27X in FY22. The stock also offers an attractive dividend yield of 5.2 percent.
2. Broadcaster Sun TV Network is next on our list with a P/E and P/B ratio of 10.7X and 2.2X respectively. In comparison, the company reported an RoE of 21.6 percent in FY22. It is also a debt-free company with a significant amount of free cash on its books. The company has faced some growth challenges in recent years but the advertising environment is improving now.
3. Public sector aluminium producer National Aluminium also called NALCO is next on our list. It is currently one of the cheapest metal companies in the country with a P/E multiple of 6.1X and a P/B ratio of 1.2X. In comparison, the company reported an RoE of 25.4 percent in FY22. It is also a debt-free company with a dividend yield of 7.7 percent - one of the highest in its peer group. Metal stocks suffered in the second half of 2022 due to a global decline in the prices of industrial metals but prices are once again rising which is good for Nalco earnings.
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4. Gujarat State Petronet is the next company on our list with a P/E and P/B of 9.4X and 1.8X respectively. In comparison, the company reported an RoE of 31.2 percent in FY22 among the highest in the oil & gas industry. This makes it an attractive long-term investment given its steady growth over the years and market leadership in the state of Gujarat.
5. Our next pick is technology hardware distributor and wholesaler Redington Ltd. It’s a market leader in IT hardware distribution and is currently available at an attractive valuation with P/E and P/B of 10.1X and 2.3X respectively. In comparison, the company reported an RoE of 24.5X in FY22.
6. Automotive and industrial lubricant maker Castrol India is next on our list with P/E and P/B ratio of 15.1X and 6.8X respectively - among the lowest in the MNC stocks. In comparison, the company reported an RoE of nearly 50% in FY22. The company has faced growth pangs in recent years but a revival in the car and commercial vehicle sales is positive for its earnings growth. Besides, it's a debt-free company with a dividend yield of 4.4%.
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7. The Murugappa group flagship EID Parry is next on our list with a P/E and P/B ratio of 9.3X and 1.7X respectively. In comparison, it reported an RoE of 31.8 percent in FY22. The company is one of the biggest sugar and fertiliser producers in the country with a strong balance sheet and stellar growth record.
8. Yarn maker Vardhman Textiles is next on our list with P/E and P/B ratios of 7X and 1.1X respectively. In comparison, it reported an RoE of 21.9X in FY22 among the best in the textile industry. It also pays dividends consistently with a yield of 2.2% currently.
9. Petrochemical and plastic maker Supreme Petrochem comes next with a P/E and P/B ratio of 11.1X and 4.4X respectively. In comparison, the company reported an RoE of 51.4 percent in FY22.
10. Plastic product manufacturer Brightcom Group is the last stock on our list. It is currently trading at a P/E and P/B ratio of 4.8X and 0.9X respectively. In comparison, the company reported an RoE of 21.3 percent in FY22. This makes it a value buy 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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