The last two years were a roller coaster ride for investors on the stock market. Despite such conditions the midcap stocks performed better than largecaps. While the Nifty 50 gave 81% return, the Nifty Midcap 100 gave 126% return in the last two years.
This shows midcap companies are a good investment option in a bull run.
Moreover, after a market correction in 2022, several midcap stocks are trading at attractive valuations. By investing in such undervalued companies, investors can gain from a high margin of safety.
Here are five undervalued midcap stocks that must go into a value investor’s watchlist.
#1 Shyam Metaliks & Energy
The most undervalued midcap stock on our list is Shyam Metaliks & Energy, an integrated metal producing company.
The company’s current P/E ratio stands at 5.4, while its P/B ratio stands at 1.8. It’s trading at a much lower P/E ratio than its peers. The average P/E of the steel industry is 16.1.
Shyam Metaliks primarily manufactures long steel products and ferroalloys. It’s also present across the steel value chain by selling intermediate and final products.
The company has a diversified product portfolio, including long steel products, ferroalloys, sponge iron, iron pellets, structural products, and wire rods.
It’s one of the largest producers of ferroalloys in terms of installed capacity in India. It has three manufacturing facilities with a total installed metal capacity of 5.71 million tons per annum.
The company plans to increase its installed capacity to 11.6 million tons per annum by 2025 through organic and inorganic growth.
Shyam Metaliks also has eight captive power plants that generate electricity for its manufacturing plants giving it a cost advantage.
In the last three years, the company’s revenue has grown at a compound annual growth rate (CAGR) of 10.8%, driven by capacity addition. The net profit has also grown by 9.8%.
In the recent quarterly results, the revenue grew by 51.7% year-on-year (YoY), and the net profit has jumped by 95.7% (YoY). The company also announced a capex of Rs 9.9 bn for 2022 and 2023, in line with its goal to double the capacity by 2025.
Going forward, the revenue growth in the medium term will be driven by capacity addition.
#2 Manappuram Finance
Next on our list is India’s leading gold loan non-banking finance company (NBFC), Manappuram Finance.
Its shares are currently trading at a P/E of 6.8, much lower than the industry average of 26.3.
Manappuram Finance is engaged in offering fund-based and fee-based services such as gold loans, microfinance, vehicle loans, and housing loans. It also ventured into the insurance broking business.
It has a network of 4,637 branches across the country and manages assets worth Rs 272 bn.
In the last three years, the net interest income has grown at a CAGR of 13.2%, driven by higher disbursements. The net profit also grew at a CAGR of 22%, led by the lower lending cost.
In the recent quarterly results, the net interest income slightly declined by 12.3%. The net profit also fell by 46% due to higher provisions. However, the consolidated assets under management (AUM) grew 10% YoY.
The company aims to increase its profits by reducing its operating costs and increasing its collection efficiency.
Third on our list is CESC, the flagship company of RP-Sanjiv Goenka Group.
The stock’s P/E ratio currently stands at 8.2, while the P/B ratio is 2.6. Its closest competitor, NTPC, is trading at a P/E of 9.5. In contrast, its peers in the industry are trading at an average P/E of 74.7.
CESC is engaged in the business of electricity generation and distribution to more than 3.3 m customers across Kolkata, Howrah, Rajasthan, Maharashtra, and Noida.
It’s the sole power distribution licensee in Kolkata and Howrah, with a validity up to 2038.
The company has a 2,500 megawatt (MW) power generation capacity across four power plants. It also has a renewable power capacity of 174 MW across four wind plants and one solar plant.
In the last three years, CESC’s revenue has grown at a CAGR of 3.3%. The net profit also grew by 6.5%, driven by its cost-plus nature supporting profitability.
In the recent quarterly results, the revenue and net profit grew by 4.2% and 0.6%, respectively.
Going forward, increased adoption of digital payments and a diversified customer base will improve the company’s collection efficiency indicating stable cashflows.
#4 Mazagon Dock Shipbuilders
Fourth on our list is Mazagon Dock Shipbuilders, a leading shipbuilding yard in India.
The shares are currently trading at a P/E ratio of 8.8 and P/B of 1.1. This compared to the average industry P/E of 17.5. The shares of Mazagon Dock looks undervalued.
It’s engaged in the business of building and repairing ships, destroyers, warships, tankers, and submarines for the Indian Navy and Indian Coast Guard.
The company has a shipbuilding capacity of 4,000 deadweight tonnage (DWT) and is expanding its capacity by building a new plant in Navi Mumbai.
In the last three years, the revenue of the Mazagon Dock declined slightly due to the pandemic. As a result, its net profit also declined, but the company managed to have a net margin of 11.2% in the last fiscal.
In the recent quarterly results, the company’s revenue grew 6.3%. The net profit jumped 56.5% due to a strong order book.
Going forward, the company is set to benefit from its strong order book and the government’s push towards indigenisation.
#5 Motilal Oswal Financial Services
Last on our list is Motilal Oswal, a leading financial services provider.
The company’s shares are trading at a P/E of 9.3, which is much lower than the average P/E of 26.5 in the financial services industry.
Motilal Oswal started off as a broking unit and later ventured into asset management services, investment banking, private, margin financing, housing finance, and venture capital management.
It has a network of over 2,500 business locations spread across 550 cities serving over 1.6 m customers.
In the last three years, the company’s revenue has grown at a CAGR of 12.5%. Net profit has also grown by a healthy CAGR of 61.3%, driven by the growth in its broking business.
In the recent quarterly results, the revenue grew by 9.1%. However, the net profit declined by 28% due to a higher provision.
Being among the top 10 brokers in India, the company will witness robust growth due to higher investment participation in the market in the last few years. Going forward, with higher liquidity in the market, the company is expected to grow its broking business further.
Why should you invest in undervalued midcap stocks?
Midcap stocks are under-researched stocks in the market. As a result, they are usually under-owned.
Hence, they give their investors immense opportunity to unlock their value in the long term. However, they come with a certain risk attached to them. Along they have high growth potential, these stocks are also more volatile than largecaps.
If you are willing to take the risk and invest in sound midcaps for the long term, there are high chances of earning promising returns.
However, before investing in undervalued midcaps, you will have to check for the financials and fundamentals of each company.
Remember that investing in the right stock is not a hard mountain to climb. A little due diligence will guide you in choosing the right stock for your portfolio.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)