One year of lockdown: These midcap stocks rallied up to 743% from Covid lows

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Midcap stocks have recovered sharply from their March 2020 lows on the back of robust liquidity, attractive valuations and strong earnings growth in the December quarter. The benchmark BSE Sensex has gained nearly 85% to 49,858 on March 19, 2021 from 26,674.04 on March 24, 2020. On the other hand, the BSE Midcap index has gained 103% to 20044.50 during the same period.

With a rally of 743%, Adani Green Energy emerged as the top gainers in the midcap space. Shares of the company have jumped to Rs 1,191.80 on March 19 this year from Rs 141.54 on March 24, 2020, when prime minister Narendra Modi announced the nation wide lockdown to curb the Covid-19 pandemic.

In the latest update, Adani Green Energy recently announced that it has signed a share purchase agreement for the acquisition of 100% stake in an SPV holding 50 MW operating solar project of the Toronto-headquartered SkyPower Global.

Other Adani group entities including Adani Enterprises (up 587%) and Adani Transmission (up 314%) stood among other major gainers in the index. Overall, as much as 48% of BSE Midcap stocks delivered more than 100% return to investors during the period.

Commenting on the broader markets, Rajesh Agarwal, Head of Research, AUM Capital Market said, “There are huge opportunities in midcap and smallcap space as valuations look high in largecaps. A pro-growth budget with a liberal fiscal deficit of 6.8% of GDP for FY22, announcements made regarding privatisation of CPSEs, higher capex spending towards physical/social/infrastructure and manufacturing sector (PLI schemes) along with increased consumption due to pent-up demand would be huge positives.” The market analyst is bullish on stocks like IRCTC, Aditya Birla Capital, Balaji Amines, Polycab, West Coast Paper and Graphite India.

holamandalam Investment & Finance, Jindal Steel and Power (JSPL), Steel Authority of India (SAIL), Adani Power, Ashok Leyland, Emami, Aditya Birla Capital, IDFC First Bank, Vodafone Idea, Tata Power, L&T, Max Financial, Shriram Transport Finance, Bharat Heavy Electricals, Apollo Hospitals and Info Edge have gained between 150%-270%.

Going with market experts, there are fundamental reasons for the broad-based rally in the domestic equity market. First and foremost, the domestic economy has largely witnessed a V-shaped recovery post-Covid induced disruption, even the recent monthly GST collection at Rs 1.13 lakh crore for February is encouraging, signaling upbeat momentum. Secondly, the government has clearly expressed its intent for growth through its recent Union Budget 2021-22 where the focus clearly is on capex, infrastructure development and job creation.

Thirdly and most importantly, India Inc is at the cusp of high double-digit earnings growth for corporate India amid the worst of the asset quality issues in the banking space behind us. Hence, all these factors amid the low-interest rate scenario are conducive for equity investments.

G Chokkalingam, Founder, Equinomics Research and Advisory believes that exorbitant overvaluation of largecaps, entry of a huge number of new investors into the markets and still more than 60% of small and midcap (SMC) stocks are trading much below their prices in 2018 would help the SMC pack this year to outperform.” Chokkalingam is positive on stocks like Unichem Labs, LG Balakrishna, Nesco, GE Shipping and Caplin Point Labs in the midcap space.

Muthoot Finance, Mphasis, Bharat Forge, Glenmark Pharma, Tata Consumer, Supreme Industries, Godrej Properties, Bajaj Holdings, Amara Raja Batteries, Bharat Electronics, AU Small Finance Bank, L&T Finance, Cummins India, PI Industries, Jubilant FoodWorks, Hindustan Aeronautics, Endurance Technologies stood among other midcap firms which gained more than 100% during the same period.

Commenting on the second rung stocks, Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities said, “Stock prices are a slave to earnings. Investors anticipate future earnings growth and discount them in advance by evaluating it at an appropriate level. If earnings of any company go up-its stock price invariably follow it to higher levels, though the path may not be linear.”

He further added that after suffering from the Covid-19 pandemic induced slowdown, the economy is expected to recover sharply in 2021-22. The government has decided to support GDP growth by providing for funding higher capital expenditure by higher borrowing and fiscal deficit. Government policies like Atma Nirbhar Bharat and PLI schemes offer a unique opportunity for smaller companies to grow their businesses.

“Reserve bank of India has kept loose monitory policy and managing to keep borrowing cost relatively lower for corporate. Midcaps and small caps companies will get the benefit of these lower funding costs and a recovering economic cycle. Higher business growth prospects and better profitability has excited investors to hunt for opportunities in mid and smallcap space,” Vakil said, adding investors can Alkem Lab, Birla Corporation, Fine Organic, Godrej Agrovet, IRCON International, Kalpataru Power Transmission, KNR Constructions and NCC for long term.