The Top 10 Most Undervalued Midcap Stocks to Watch in 2023
In November 2022, the Indian stock market reached a record high, and the upward trend persisted into December. However, recent days have seen a change in the situation.
Markets have declined due to worries about the global increase in Covid cases. The decrease has also been influenced by worries ahead of the Reserve Bank of India’s most recent policy meeting and important macroeconomic data from the US.
How do Mid-Cap Stocks work?
The word “mid-cap” broadly refers to businesses and equities that sit between the large-cap and small-cap categories. The market capitalization of each company determines how its stocks are categorised. Such a classification is flexible and subject to variations in market valuation.
The number of outstanding shares and share price of a corporation is used to calculate market capitalization. The ranking of a company in benchmark indices like the Sensex and Nifty, however, also has an impact on the categorization. For instance, the companies that are listed in the Nifty Index between positions 101 and 250 are typically referred to as mid-cap corporations.
The top 50 most actively traded mid-cap stocks are included in the Nifty Midcap 50 benchmark mid-cap index, which is also available in India.
What Qualifies It?
The following are some of these stocks’ key characteristics:
- Diversification: Mid-cap shares are between small and large-cap stocks at both ends of the spectrum. The profits and risks associated with these shares differ. While some mid-cap firms may have recently transitioned from small-cap status and thus provide more returns compared to stability, others may still be in the early stages of development and thus offer better stability instead of returns.
- Growth potential: One of the most alluring features of these stocks held by Indian mid-cap firms is that they have a strong chance to increase their profitability, productivity, and market share. During a bullish market or a market expansion, investors can expect such enterprises to become overnight successes, which will massively enhance their profits.
- Moderate risk: These equities react to market volatility less strongly than small-cap stocks. However, they provide less stability during a market contraction or a bad market compared to large-cap companies.
- Liquidity: When compared to small-cap stocks, mid-cap stocks are more readily traded. Investors can trust the shares of companies with such stocks because they are well-known. As a result, it is simpler to identify buyers during a sale at a reasonable price.
Even while these short-term worries can still have an impact on the markets, this could be a fantastic time to invest to find the top midcap stocks for the long term.
The top 10 inexpensive midcap stocks to keep an eye on in 2023 are listed below.
DCM Shriram is the first on our list. In the last five years, DCM Shriram’s share price has skyrocketed, giving its stockholders a 50% return. The share price has decreased 10% since the start of the year, nevertheless. A mere 17% higher than its 5-year median P/E of 10.2 times, it is currently trading at a price-to-earnings ratio (P/E) of 12.1.
Conglomerate DCM Shriram is one. It operates a diverse range of companies, from sugar and cement to chemicals and agricultural products. While sugar and agricultural goods together generate over 40% of the business’s revenues, which total over 51%, the remaining portion comes from other cement and smaller enterprises.
In the last few years, the company’s business has experienced significant growth. The net profit has increased at a 14.1% CAGR over the past five years, while sales have expanded at a 10.6% CAGR.
High return ratios as a result of this exceptional performance have allowed the company to maintain a strong balance sheet. The debt-to-equity ratio is modest at 0.27 times, and the 5-year average return on equity (RoE) is 21.4%.
Gujarat Ambuja Exports
Gujarat Ambuja Export is the next item on our list. The stock price of Gujarat Ambuja Export has increased by 46% since the start of the year and 1.6 times in the last five years. Despite this, the company is trading 14% above its 5-Year P/E with a PE of 13.3 times.
The company’s main line of business is agro-processing, and it dominates the markets for cotton yarns, edible oils, and maize products. It serves the food, pharmaceutical, and feed industries and competes in both the domestic and international markets.
It exports to more than 75 countries and has 12 manufacturing locations dispersed throughout India. Its presence in the domestic market is primarily fueled by the edible oil and maize processing industries. The edible oil business produces 38% of overall sales, compared to the maize processing unit’s 56%.
The company has been able to perform well over the previous few years thanks to its leading position. Sales have increased at a CAGR of 8.4% over the past five years, whilst net profit has grown at a CAGR of 33.7%.
This enabled the company to retain a sound balance sheet with less debt by increasing the RoE from 15% in the 2018 fiscal year to 25% in the 2022 fiscal year.
Transport Corporation of India
The Transport Corporation of India is ranked third on our list (TCI). Over the previous five years, the stock price has doubled. However, since the start of the year, it has decreased by more than 14%. It is currently selling at a P/E ratio of 15.3, which is a 12% discount from the 17.4 times 5-year average.
TCI is India’s top provider of organised freight services with a presence throughout the whole country. The company specialises in providing integrated logistics and supply chain solutions to the retail, automotive, chemicals, and healthcare sectors.
It has a significant presence in several industries, including coastal shipping, bulk and container transportation, and road and rail transportation. It distinguishes itself from rivals by providing last-mile connection thanks to this integrated service. And the company’s recent success is a convincing demonstration of it.
The net profit has increased by 32.1% over the past five years, while sales have expanded at a 10.9% CAGR. Strong returns have resulted from this, with a 5-year average RoE of 14.8%. The company has a spotless balance sheet, with a debt-to-equity ratio of 0.36.
The Eris Lifesciences
On our list, Eris Lifesciences is fourth. The value of the company’s shares has been declining since the year’s commencement. Its decline is over 13%. A 6.5% discount from its 5-year median PE of 24.6 times, it is currently trading at a PE of 23 times.
A pharmaceutical company is called Eris. Chronic and sub-chronic therapies account for a sizeable share (93%) of the company’s business in the domestic market for branded formulations, where it earns its revenue.
They have been able to grow their business and maintain high profitability thanks to their powerful and long-lasting brands. Sales have increased at a 13.2% CAGR over the past five years, but net profit has increased at a 10.5% CAGR.
Additionally, the RoE has improved, with a 5-year average of 28.5%. The corporation has been able to keep its debt levels low and its balance sheet strong thanks to this performance.
Firstsource Solutions is ranked fifth on our list. Since the start of the year, the company’s stock has underperformed due to concerns about a global recession. It is currently trading at a PE of 15 times, which is only 9% more than its 5-year median PE of 13.7 times. It is down 32%.
The banking, financial services, and insurance (BFSI) industry account for 43% of Firstsource’s overall income, followed by the healthcare (34%), communication, and media (20%) sectors. The business has a well-diversified revenue stream, with 35% of sales coming from its top five customers.
The firm has grown tremendously in recent years. The revenue and net profit have grown by 10.7% and 14%, respectively, on a 5-year CAGR basis. Strong returns increased the RoE from 15% in the 2018 fiscal year to 18.7% in 2022.
Like its competitors, the corporation has financed this growth with hardly any debt. In the fiscal year 2022, the debt-to-equity ratio is 0.35 times.
Birlasoft is the next company on our list of undervalued midcaps. The stock has not been immune to worries that a worldwide recession may negatively impact the whole IT sector. Over 35% of the stock’s value has been lost since the year’s commencement. A 21% increase over its historical median PE of 14 times, it is currently trading at a PE of 17 times.
The manufacturing industry accounts for 46% of Birlasoft’s overall revenue, followed by the pharmaceuticals (22%), banking, financial services and insurance (BFSI) (17%), and energy and utilities (15%) sectors.
The company touts a well-diversified revenue stream, with 30% of its sales coming from its top five customers. The USA, which generates about 80% of all revenues, is where most of the business is generated, followed by Europe (11%) and the rest of the globe (9%).
Revenues and net income at Birlasoft have shown 5-year CAGRs of 4.4% and 14.2%, respectively. With no debt, the balance sheet is solid, and the 5-year average RoE is 16.2%.
Computer Age Management Service
On our list, Computer Age Management Services is ranked seventh (CAMS). Since the year’s commencement, the stock price of the corporation has decreased by more than 15%. With a 13% discount from its 5-year median PE of 45 times, it is currently trading at a PE of 39 times.
The Indian mutual fund industry’s largest registrant and transfer agency are CAMS. An overall 69.5% market share of the assets managed by mutual funds are held by the company. Ten of the top fifteen largest mutual funds in the nation are among its mutual fund clients.
Their main responsibility is to provide investors, exchanges, depositories, asset management firms, and other stakeholders with a seamless interface.
The company’s recent strong growth is in large part due to CAMS’s supremacy in the industry. The 5-year CAGR for sales and net profits was 13.7% and 17.7%, respectively.
Additionally, the RoE increased, rising from 33% in the fiscal year 2018 to 46% in 2022. The company is well-positioned to profit from the fintech megatrend because of its debt-free balance sheet.
Craftsman Automation is ranked eighth on our list. Since the beginning of the year, the company’s stock price has increased by 45%, mostly due to an increase in demand in the automotive industry.
It is trading at a PE of 35 times, just 10% over its 5-year norm of 31.8 times, despite this outperformance. Craftsman Automation primarily serves the automotive industry through its three primary business categories. These include industrial & engineering (28%), automotive aluminium (20%), and automotive powertrain (52% of the revenue mix).
The business is a market leader in the machining of vital engine and transmission parts, primarily for tractors, off-highway vehicles, and medium and heavy commercial vehicles (MHCVs). Its relatively young aluminium die-casting company has, nevertheless, also flourished.
The expansion the business has achieved in recent years is proof of this. The five-year CAGR for sales and net income was 12.9% and 30.9%, respectively. This is the result of rising volume and expanding margins, which have improved returns.
While the debt-to-equity ratio decreased from 0.7 times to 0.3 times during the same period, the RoE increased from 5.5% in the fiscal year 2018 to 14% in 2022.
The V-Guard Group
V-Guard Industries comes next. The company’s stock has increased by 20% since the year’s commencement. Despite the increase, it is currently trading at a PE of 48 times, which is less than its 52 times average 5-yr PE.
Electronics producer V-Guard Industries is a player in the capital goods market. Consumer durables account for 30.6% of the company’s sales, followed by electricals (45.9%) and electronics (23.5%).
The firm has grown as a result of the company’s creative methods and a wide network of distributors. The net profit has increased by 9.6% over the past five years, while sales have expanded at a rate of 11.7% CAGR. The company does not have any debt, and its 5-year average RoE is 19.8%.
Clean Technology and Science
Clean Science and Technology is the last item on our list. The stock price of the company has decreased by about 40% and is currently trading at a PE ratio of 60 times, which is 40% less than its 1.5-year median PE of 86.7 times.
Leading chemical producer of Clean Science and Technology. It produces chemicals and distributes them to clients all over the world. China accounts for 35% of global revenues, followed by India (30%), Europe (15%), the United States (14%), and the rest of the world (6%).
The business is one of the few to have successfully commercialised environmentally acceptable methods for producing certain speciality chemicals.
The firm has grown tremendously in recent years. In the last five years, the revenues and net profit have increased by more than three times. Healthy cashflows and no debt on the books have resulted in a 5-year average RoE of 37%.
Why Would You Be A Good Fit for Mid-Cap Stocks?
Mid-cap companies have outperformed both large-cap and small-cap equities over the previous few years in a big way. They have become a favourite of seasoned investors due to their advantageous position in the stock market, where they may utilise the best of both ends, i.e. risk mitigation and significant rewards.
They aid in the diversification of an investment portfolio. The benefits of including them in your portfolio are extensive and are covered in the following points:
- Growth is simple: Compared to small-cap companies, mid-cap companies in India have a better opportunity to raise capital through credit, which increases their potential for development and growth.
- Return potential: Because most mid-cap firms are located in the middle of the growth distribution, they have the capacity for value development and the ability to pay out sizable dividends.
- Less frequently analysed: In their early days, most mid-cap shares are not frequently analysed, which draws little interest from large institutions and experienced investors. Because of the low pricing, adding it to your portfolio is more affordable.You can make significant returns if you accurately predict which stocks from a list of mid-cap stocks will likely receive more study and attention in the future and invest primarily in those funds.
- Considerable information: Unlike small-cap companies, the holders of these stocks are willing to share adequate information about their past performance and financial situation. This makes analysing businesses from a list of mid-cap stocks easier. As a result, you can conclude their profitability and growth prospects and use those conclusions to decide how much money to invest.
What are the risks of investing in mid-cap stocks?
Most often, a firm’s transition out of the small-cap tier attests to its increasing profitability and productivity, which increases both the dividends paid out and the value of the company over time.
However, not all companies included in the Indian mid-cap index may be subject to this requirement. These stocks have a few hazards attached to them: Mid-cap stocks have very few dangers attached to them.
Low-ranking mid-cap stocks are more likely to fall victim to the value trap. It refers to a situation when a business consistently makes a small profit without losing money.
- Inadequate resources: Mid-cap companies frequently lack the management capabilities and infrastructure of large-cap enterprises, which causes stalled growth.
- Cause a bubble in the financial system: Uncertain economic situations may lead to an increase in mid-cap companies and positive performance. These businesses are the first to fail when the bubble bursts.
- Alternative forms of investing: There are various low-risk alternative investing possibilities accessible if you wish to increase your returns but lack the risk willingness to invest in mid-cap equities. Government guarantees the repayment of bondholders in the case of sovereign bonds. These are among the safest available investing options.
- Debt funds: These funds use fixed-income instruments like bonds, treasury bills, and debentures to produce consistent returns for investors.
- Balanced funds: For moderate returns, these funds provide portfolio diversification through investments in both stock and debt.
- Large-cap: Financially sound and able to provide investors with considerable profits are large-cap corporations.
Smaller cheap companies may look appealing, but you must realise that the possibility of large profits is accompanied by severe volatility. However, that can be handled by making long-term investments. In addition to assisting you in navigating any brief market fluctuations, it can allow undervalued firms to reach their full potential.
Compared to their larger competitors, small businesses are more flexible and have more room for expansion. Additionally, some midcaps have reduced trading costs and valuations, which could lead to larger profits. As a result, the company can swiftly begin its fast track to growth once it seizes a wonderful chance.
However, before investing your hard-earned money, you must exercise due care and thorough study, regardless of how high the rewards may be.
edited and proofread by nikita sharma