Strategy: SMID | Correction is reason to go for bottom-up approach

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Medium-term opportunity has opened up; FY23-24e EPS growth at ~40/23% y-y.

Subdued demand and cost pressures decelerated PAT growth in Q3FY22. YTD correction in SMID indices (7-13%) has been steeper vs Nifty 50 (-3%). But, this could provide an opportunity to evaluate bottom-up stock ideas from a medium term perspective, given expected capex revival. We are hosting 2nd JEF India Midcap Summit on 15-16 Mar22, with 68 cos. Key monitorables now are demand recovery, cost pressures and price hikes.

Potential opportunity: YTD correction in SMID stocks has outpaced that in large-caps. Nifty Midcap100/Smallcap100 indices fell by -7%/-13% YTD vs. -3% in Nifty 50. But, current market volatility could create investment opportunities for medium term. The Indian economy recovered faster during the pandemic vs. initial expectations. We believe India would have entered a period of economic upcycle, driven by expected revival in capex (Govt push) and housing, which could eventually drive a broad-based investment cycle. Historical analysis suggests that Midcaps tend to outperform during phases of growth acceleration. Thus, the recent correction could provide a good opportunity for investors to evaluate bottom-up stock ideas.

JEF SMID coverage performers: Oct’21 saw market peak. Within JEF SMID coverage (MCap<=$4 bn), the best performers over past 6M are Industrials (Bluestar, Amber, KEI, Thermax, IEX) and Devyani Intl & Oberoi Realty. Stocks which notably corrected from their peaks are Gas (IGL, MGL), Electrodes (HEG, GRIL), select Financials (Max Financial, Nippon AMC) as well as WHIRL & Ramco Cement.

Q3FY22 scorecard: While JEF SMID coverage sales grew by +8% y-o-y, Ebitda margin decline impacted PAT (+3%). OPM posted decline both y-o-y (-190bps) and

q-o-q (-100bps), indicating rising cost pressures. FY23/24e earnings were cut in 43% cos within coverage, while ~15% cos saw upgrades. Key upgrades were seen in Property (Oberoi, Prestige, Sobha), Navin Fluorine, Coforge, IGL and Max Financial.

Outlook; key catalysts and risks: We recommend a bottom-up stock picking approach, given the recent pull-back. JEF SMID coverage could post FY23/24e EPS growth of ~40%/23%y-o-y mainly driven by cyclical recovery in select Industrials, Electrodes, Financial stocks, coupled with Amber & Dixon. Average coverage RoE is likely to improve from 18.7% in FY22e to 20.5%/21.2% in FY23/24e, resp. However, given the current global geopolitical tensions, volatility in commodities, freight and energy costs could pose a key risk to FY23 margins. Timely price hikes will be key for margin normalisation.



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