Updated – Dec 2022

In this article, we will cover,

• Overview of the Midcap Stocks in India
• List of Best Midcap Stocks to buy now in India
• Key things an investor should look at before adding midcaps stocks
• Detailed profile, pros and cons of MidCap Stocks in the model portfolio
  – Crompton Greaves Consumer Electricals (CGCEL)
  – Relaxo Footwears
  – Polycab India (PIL)
  – Deepak Nitrite (DNL)
• Few risks associated with these midcap stocks

Midcap Stocks in India – Overview

Midcap is a term that encloses companies and stocks which fall in between large-cap and small-cap categories. Midcaps fall in the range of Rs 5,000-20,000 crore. This classification is variable and can change with the change in a company’s market valuation. The term market capitalisation is reckoned with the help of a company’s outstanding number of shares and the value of each share. However, the classification is also subject to a company’s rank in the benchmark indices such as Sensex and Nifty. For instance, the companies which are listed from 101st – 250th in the Nifty Index are generally considered mid-cap companies. Nifty also has a benchmark mid-cap index in India called the Nifty Midcap 50 which hosts the top 50 most traded mid-cap securities in the market. 

Given their advantageous position in the stock market, where they can exploit the best of both ends, i.e. risk moderation and substantial returns, they have become a favourite for seasoned investors. They also aid in diversifying an investor’s portfolio. A company’s graduation from small-cap, in most cases, attests to its growing profitability and productivity until it reaches the large-cap tier. In the process, there is an increase in both components of returns – dividends and value appreciation.

List of Best Midcap Stocks to buy now in India

Key things an investor should look at before adding midcaps to their portfolio: 

Financial Health: No matter what size’s stock you’re interested in, it’s important to invest in companies with strong balance sheets. Given the unpredictability of business, a strong balance sheet can help companies survive the lean years. Moreover, a stronger balance sheet enables midcap companies to be less riskier. When investing in mid-caps, you are in a way combining the financial strength of a large-cap with the growth potential of a small-cap with the end result often being above-average returns.

Growth: Revenue and earnings growth are the two most important factors in long-term returns. Mid-cap stocks have outperformed both large-cap and small-cap stocks because of their superior growth on both the top and bottom line. Industry experts suggest mid-caps are able to produce better returns because they are quicker to act than large caps and more financially stable than small caps, providing a one-two punch in the quest for growth. Investors interested in mid-cap stocks should consider the quality of revenue growth when investing. If gross and operating margins are increasing at the same time as revenues, it’s a sign the company is developing greater economies of scale resulting in higher profits for shareholders. Another sign of healthy revenue growth is lower total debt and higher free cash flow. The list goes on and all other factors used to assess strong quality stocks apply here. It is also vitally important with mid-caps that you see progress on the earnings front because that’s what’s going to turn it into a large-cap. Revenue growth is important but operational growth is vital.

Management Quality: The most important factor one should be mindful of while investing in mid-cap companies is management quality. Since large-cap companies have a long history of in-depth coverage by research and brokerage houses, investors can be more confident about the quality of their management. But in the mid-cap space we have to ensure that the company’s management has the capability and bandwidth to take the company to the next level. However, as mid-cap companies are generally under researched, there is a need for stricter due diligence.

Competitive Advantage: This is one of the best ways to identify a good midcap stock. A company can stay in competition by offering better services and products as it grows. For example, Madras Rubber Factory (MRF Ltd as it is now known as) was started by a small town balloon toy manufacturer and the company has been improvising its products and services as per the demand of customers. This zeal to keep innovating and tweaking or diversifying their offering as per demand has given them a competitive edge over contemporaries and kept them going strong over the years. To spot whether a company possesses a competitive advantage, see how innovative they have been. You can do so by taking a look at the patents they have, how active their R&D wing is, and how frequently they launch innovative products and services. Competitive advantage can be in terms of product or price. Price advantage is also important. A price setter usually gets the first mover advantage to lead the rally while its peers follow. It is best to go with the leader of the pack rather than the laggard.

High Margin Businesses: Another important criterion for a good midcap stock is to look for businesses that have high margins. Usually companies command high margins either due to a lack of competition or some moat, some operational efficiency or because they command a leading position in the industry. Moreover, these stocks should have sustained margin over time that doesn’t fluctuate every quarter or year.

Detailed profile, pros and cons of MidCap Stocks in the model portfolio

Crompton Greaves

Crompton Greaves Consumer Electricals (CGCEL), the demerged consumer business of Crompton Greaves (CG), is the undisputed market leader in the fans segment and a formidable branded player in the light consumer electrical market. Post demerger, the new management with wide experience in FMCG and consumer electrical space sat at the helm of the new entity with a mandate to focus on premiumisation and growth. New promoter (Advent) boasts of a long and credible investment history in consumption sectors. Advent has invested in nearly 50 consumer products and industrial companies and is investing in India since 2007. CGCEL has an excellent product portfolio focusing on product innovation and diversification. Crompton’s efforts to save costs (via Project Unnati), focus on premiumisation and timely price hikes helped it protect profitability in unfavourable inflationary environment. The company has been focusing on appliances and the next key segment will be small appliances, especially mixer grinders.

It is also looking to restore value in the market by bringing in innovative & premium products like the ‘Antibacterial Bulb’. It has a robust distribution network in the consumer electrical space of 3,000 plus distributors and 100,000 plus touch points. The company’s investment in rural business continues to drive growth. The company has a good track record of ~32.78% return on equity in the last 3 years. It also has a healthy dividend payout of ~26.7%. Going forward, macro developments like nuclear families, availability of easy finance and government’s thrust on affordable housing are expected to push up the per-capita consumption in the country and sustain the growth momentum of this business. On the negative front, the company faces high competition from leading players such as Orient Electric, Havells, etc which could lead to a loss in market share in key products.

Coforge 

Coforge is one of the leading mid-sized Indian IT services company, and is engaged in Application Development and Maintenance, Managed Services, Cloud Computing, and Business Process Outsourcing to organizations in a number of sectors viz. Financial Services, Insurance, Travel, Transportation and Logistics, Manufacturing and Distribution and Government. In Q2FY23, the company witnessed one of the lowest declines in attrition levels in the industry at 16.4%. It reported an order intake of $304 million, making it the third consecutive quarter of more than $300 million order intake. The total order book executable over the next 12 months stands at $802 million. Moreover, Coforge reiterated its revenue growth forecast of at least 20% in CC terms, an adjusted EBITDA margin band of 18.5-19% for FY2023. The company has strong execution capabilities, continuous order wins, healthy client metrics along with scaling growth of top accounts, and a favourable outlook across verticals- BFS, Insurance, and Travel. On the other hand, intense competition among local players and from multinational corporations poses a challenge for the company.

Relaxo Footwears

Relaxo Footwears is one of the largest players in the non-leather footwear market in India with its promoters having been involved in the footwear business for over three decades. Over the period, the company has successfully expanded in new product categories, geographies and customer segments. It has eight manufacturing facilities with a capacity to produce ~7.5 Lac pair/day. The company has a pan-India network of distributors and retail stores supplying Relaxo products through more than 50,000 point of sales (POS), resulting in high geographical and customer diversification. Relaxo has also started selling its products through e-commerce websites such as Amazon and Flipkart to reach a wider customer base. The market position of the company’s products has also improved over the years on account of significant advertising and branding initiatives and celebrity endorsements. RFL started with a single product (Hawai slippers) and has over the years been successful in diversifying into higher value slippers as well as casual and sports shoes, along with increasing the share of high-value products in its portfolio. The company maintains superior return ratios as evident by its ROE and ROCE profile which grew at a 5-Year CAGR of 19.2% and 24.8% respectively. In addition, it has a healthy dividend payout of 20.6%. The company is in capex mode and significant capex-related outflows are expected to continue going forward as well, reducing the free cash flows of the entity. Nonetheless, the internal cash flows are likely to be adequate for meeting capex requirements without any reliance on external debt.

Polycab India

Polycab India (PIL) is among the leading companies in the Indian cable and wire industry with about          market share in the organised wires and cables markets. The company’s founders have over four decades of experience in the industry. PIL’s market position is facilitated from its strong distribution network of over 4100 authorized dealers. It has significant market share in West and South India, which contributes around 70% to its revenue share. PIL’s market is concentrated and the company is focusing on expanding its network to reach every district in India. The company has also entered the electrical appliances segment (contributing around 10% to revenues), which it plans to grow significantly over the medium term. PIL has 25 manufacturing facilities(including 2 Joint Ventures) located at Daman in Daman and Diu, Halol in Gujarat, Nashik in Maharashtra and Roorkee in Uttarakhand. Financial risk profile is strong, driven by a large networth of over Rs 5,833 crore and healthy capital structure.

PIL is a net-debt free company with a strong interest coverage ratio of 35.6x. On the growth front, PIL Revenues and Profits have grown significantly at a CAGR of 17.3% and 30.8%  respectively over the past 5 years. The company is domestically focused with only 8% revenue coming from exports in FY22 which is a drawback. Sudden fluctuations in raw material prices may affect the PIL’s margins negatively. Raw material costs such as copper, aluminium, steel, PVC form a significant portion of the company’s operating expenses. Majority of the raw materials required are imported and hence Polycab is exposed to foreign exchange volatility risks as well.

Deepak Nitrite (DNL)

The Indian specialty chemicals industry is now one of the fastest growing industries globally (next only to China), delivering 13 per cent annual average growth over the last five years reaching $25 billion. Deepak Nitrite (DNL) is expected to benefit from both macro and micro factors in future. Deepak Nitrite established in 1970s is well diversified with presence across three segments viz. Basic Chemicals (BC), Fine and Specialty Chemicals (FSC), and Performance Products (PP).  It is one of the leading global players for several niche chemical products such as Xylidines, Cumidines, Oximes & Colour intermediates and caters to several industries- Colorants, petrochemicals, Agrochemicals, rubber, pharma, paper, etc. DNL enjoys strong competitive positioning in most of its product categories and has a strong client base catering to over 900+ clients in over 40+ countries. DNL has manufacturing facilities located at Nandesari, Dahej (Gujarat), Roha, Taloja (Maharashtra) & Hyderabad (Telangana) & R & D facility at Vadodara. Also one-third of its revenue is from exports, providing geographical diversity. DNL maintained a strong healthy revenue and profit growth CAGR of 37.8% and 87% over the past 5 years. It will sustain its healthy market share, given its leadership position, established track record, and large R&D capabilities leading to technical expertise. On the other hand, the company remains vulnerable to volatile crude oil prices, which can eat into profits.

There are many names like Airtel and Infosys which were lesser-known companies about 25 years ago, comprising the once small and mid-cap stocks of India. These companies are now prominent large-caps that have generated very good returns over the years for investors. Indeed, it’s hard to believe! Today they are among the heavyweights of the country’s large-cap indices. With a fast growing economy like ours and liberalised industrial and services sectors, the chances of finding small and mid-level companies with potential to become large corporations are much better than the developed economies like the US and Europe.

MidCap Stocks for investments, Watch our video on how to analyse 

However, A few risks associated with these midcap stocks are:

Value Trap: Value trap is when a company consistently operates in low profits with limited cash flows and cannot break through the phase while investors hang on to them thinking they will grow one day. Mid-cap companies, especially the low ranking ones, are prone to being value traps and might go defunct if the trend continues for a longer period.

Inadequate resources: Mid-cap companies are likely to have less efficient managerial and organisational infrastructure than large-cap companies. Therefore, even though they reap high profits and attract value appreciation, they might not be equipped to utilise the same optimally.

Effect of a financial bubble: A mid-cap company’s exceptional performance can be a result of an unstable financial bubble. Most of these companies, however, do not have the financial fortitude to withstand when the bubble pops. Therefore, when scouring through the best mid-cap stocks, ensure to check their financial history pre-bubble to determine their financial fortitude accurately.

Midcap Stocks – Model Portfolio

In order to get an exposure to best midcap stocks, you need a total of Rs 21,274 for the below curated portfolio as of Dec 16, 2022.

Detail Table Containing Key Metrics of Mid Cap Stocks

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