2 quality midcaps to bet on as market goes for recovery play

It is not likely to be a broad based rally. It will be selective within sectors and across sectors, says Siddhartha Khemka, Head of Retail Research, MOSL.


Where do you see maximum traction coming in on the index?
We have seen quite a sharp runup in the last few months, especially in the last couple of days. Strong FII flows of more than Rs 25,000 crore came in just 10 days. That has largely gone into large caps. From here on, the valuations are still not extensive but at marginally above the long period average even if we were to take in the FY22 earnings growth, it is still at 18.5-19 times. That is marginally higher than the long period of average of about 17.5 times. We expect the larger market to consolidate or the momentum to continue. The focus may shift a little bit towards some of the quality midcaps where the growth is coming.

It is not likely to be a broad based rally. It will be selective within sectors and across sectors which have delivered and are still showing growth. In the midcap space, we will have recovery plays like Aditya Birla Fashion and Retail which is into branded apparels and where we believe that despite the lockdown impact, growth is improving and one can look at it as a recovery play. In the IT midcaps, we like Mphasis where the recent growth in terms of deal wins and improvement is looking attractive. These are some of the names from the midcap space that should do well over the coming few months.

What did you make of the finance minister’s announcement especially for realty and home buyers?
What we heard from the Finance Minister is incrementally positive for the home buyers, for the real estate market and for the whole bunch of home ancillary or building material sector. Any kind of relief for home buyers will only add to the margin of the overall demand for real estate. This is incrementally positive and a lot more needs to be done. The market wants a lot of things from the government and to that extent, there could be some disappointment but we are seeing this as one step ahead and look at it positively.

We have seen a rebound in some of the pharma names which had started to lag within the pack, Which are the names that you are going to keep an eye on?
After a sharp rally, there was a pause in case of pharma as well as the IT sectors. With the news of the new US president being elected and a Covid vaccine being in the final stages of development, their focus has shifted from defensives to some of the economy facing sectors. That where some of the profit booking came in.

Having said that, we believe pharma as a sector has a huge headroom and a long runway for the next few years given the structural changes that we have seen in the last couple of months. One is from the regulatory angle where the USFDA approvals for a lot of products and plants will open up a lot of growth opportunities going ahead. Now with Biden coming in as US president, there will be focus on the Obama healthcare package which will again bring a lot of growth for the pharma sector from the US market. Our top pick in this sector is Divi’s Lab which is in the CRAMs space and then Dr Reddy’s which has a more diversified presence in formulation, generics as well as some of the API segment.

Which should be your preferred picks among private as well as select PSU banks?
In the last couple of months, banking and financial stocks bore the maximum brunt of the pandemic both in terms of sentiment as well as in terms of the selling in that market. In a couple of weeks, we have seen the interest coming back with institutional flows moving away from defensives like IT, pharma and telecom to financials. Within that, a few stocks like HDFC Bank or a Kotak Bank which are almost reaching new highs. But there are stocks which are available at a much more attractive valuation and which offer a lot of opportunities.

We like two stocks in the banking space. One is from the the PSU space. It is SBI which is India’s largest bank and the latest earnings show earnings normalisation has started. We are seeing the normalisation of core business earnings and growth coming back with economic recovery. It is one of the best diversified banks to play India’s economic recovery.

In the private banking space, we like ICICI Bank. The bank has been reporting good growth in numbers, the asset quality stabilisation as well as improving slippages plus it has a good franchise which is leading to strong growth both in deposit as well as on the liability side.

So these two banks can be looked from a one-year perspective and both should give good returns to retail investors.