Buy on dips? HSBC bullish on these 8 mid-cap stocks
The global financial services major is bullish on the broader market and believes that a deep sell-off in mid-cap from current levels seems unlikely
- Mar 21, 2024,
- Updated Mar 21, 2024 2:53 PM IST
FSN E-Commerce Ventures (Nykaa), Equitas Small Finance Bank, Titagarh Rail Systems, Prestige Estates, Phoenix Mills, Ipca Labs, Voltas and Kalyan Jewellers are among the top mid-cap picks of HSBC. The global financial services major is bullish on the broader market and believes that any deep sell-off in mid-cap from current levels seems unlikely.
Of late, the BSE MidCap index cracked more than 4% on a month-to-date basis till March 20. On the other hand, the BSE SmallCap index plunged 8% during the same period, prompted by the market regulator Sebi warning of expensive valuations in the midcap and small-cap space. This has now triggered concerns on the possibility of a much deeper correction.
However, HSBC in a report also said that midcap valuations have already come down to the 5-year mean. “Midcap market breadth has declined to 73% from over 90% at the beginning of the year (60% being the normal cycle average breadth), signalling some potential downside but limited. It further added that midcap premium to large caps has fallen to 17% from 30% in January which appears to be in the mid-cycle range. Earnings witnessed a sharp downgrade in 2018 on rich expectations (22%), current expectation at 15% is more realistic,” HSBC said.
While comparing the ongoing correction with 2018, the overseas firm believes that the current macro and market dynamics are very different, and corrections should be shallower at the index level, as India’s GDP growth continues to stand out, the global liquidity tightening cycle has peaked, rate cuts likely in H2CY24, Domestic regulators (RBI, Sebi) appear vigilant and ready to take pre-emptive measures to avoid any big financial crisis, domestic fund flows through monthly SIPs have more than doubled since 2018 and are very stable, which should cushion downside risk and midcap valuation premium to large cap is more reasonable now (17%), compared to peak in 2018 (35%).
Coming to the top picks as suggested by HSBC, it sees a 57.5% upside in Nykaa and a 53.8% rise in Equitas Small Finance Bank. It also sees a 40.6% upside in Titagarh and a 26.3% gain in Prestige Estates Projects. HSBC also sees a 10%-19% upside in Kalyan Jewellers, Ipca Labs, Voltas and Phoenix Mills.
“Post correction, Nykaa’s BPC business, which is structurally growing revenue at 20%-plus, trades at appealing valuations while the value in its fashion business is likely to be unlocked as it reaches EBITDA breakeven within the next two years. On the other hand, a conversion into a universal bank, improvement in cost efficiencies would further augment Equitas ability to grow and protect its profitability,” HSBC said. Shares of Nykaa declined nearly 3% in March, while Equitas Small Finance Bank slipped 8% during the same period.
FSN E-Commerce Ventures (Nykaa), Equitas Small Finance Bank, Titagarh Rail Systems, Prestige Estates, Phoenix Mills, Ipca Labs, Voltas and Kalyan Jewellers are among the top mid-cap picks of HSBC. The global financial services major is bullish on the broader market and believes that any deep sell-off in mid-cap from current levels seems unlikely.
Of late, the BSE MidCap index cracked more than 4% on a month-to-date basis till March 20. On the other hand, the BSE SmallCap index plunged 8% during the same period, prompted by the market regulator Sebi warning of expensive valuations in the midcap and small-cap space. This has now triggered concerns on the possibility of a much deeper correction.
However, HSBC in a report also said that midcap valuations have already come down to the 5-year mean. “Midcap market breadth has declined to 73% from over 90% at the beginning of the year (60% being the normal cycle average breadth), signalling some potential downside but limited. It further added that midcap premium to large caps has fallen to 17% from 30% in January which appears to be in the mid-cycle range. Earnings witnessed a sharp downgrade in 2018 on rich expectations (22%), current expectation at 15% is more realistic,” HSBC said.
While comparing the ongoing correction with 2018, the overseas firm believes that the current macro and market dynamics are very different, and corrections should be shallower at the index level, as India’s GDP growth continues to stand out, the global liquidity tightening cycle has peaked, rate cuts likely in H2CY24, Domestic regulators (RBI, Sebi) appear vigilant and ready to take pre-emptive measures to avoid any big financial crisis, domestic fund flows through monthly SIPs have more than doubled since 2018 and are very stable, which should cushion downside risk and midcap valuation premium to large cap is more reasonable now (17%), compared to peak in 2018 (35%).
Coming to the top picks as suggested by HSBC, it sees a 57.5% upside in Nykaa and a 53.8% rise in Equitas Small Finance Bank. It also sees a 40.6% upside in Titagarh and a 26.3% gain in Prestige Estates Projects. HSBC also sees a 10%-19% upside in Kalyan Jewellers, Ipca Labs, Voltas and Phoenix Mills.
“Post correction, Nykaa’s BPC business, which is structurally growing revenue at 20%-plus, trades at appealing valuations while the value in its fashion business is likely to be unlocked as it reaches EBITDA breakeven within the next two years. On the other hand, a conversion into a universal bank, improvement in cost efficiencies would further augment Equitas ability to grow and protect its profitability,” HSBC said. Shares of Nykaa declined nearly 3% in March, while Equitas Small Finance Bank slipped 8% during the same period.