The stock market moves in a somewhat wave pattern. Even during trending trends, markets maintain such pattern. But, at times, the market breaks this harmony. Market crashes! Thus the harmony is broken. And the crashes are sometimes very severe. Traders lose money. Traders lose because they cannot withstand the pressure. Investors and traders want to save their investments, whatever left. The large-cap stocks bear the load mainly. Prices come down heavily. The Mid Cap stocks also take the burden of the crash.
But there are stocks that can withstand the burden. They show resilience. We have seen that mid-caps show resilience. These stocks stand like rocks amidst the big crashes. Even if these stocks come under pressure, they recover quickly. Stocks fall around them like nine-pins, but they stand tall. Else, after the crash is over, they recover fast. We will talk about these stocks. And we will also try to find out the reason behind. Why did they survive the crash? What are their fundamentals? What are their technical analyses telling us? Let us find out.
Market Cap is the market capitalisation. Market capitalisation means the number of free floating shares multiplied by the unit share price.
As per the market capitalisation, stocks are arranged in descending order. The top cap ocmpanies are large cap companies.
The stocks that fall in the mid-cap category come immediately after the large-caps. AS already mentioned, the top companies as per market cap are large caps. the come the mid cap category. Below mid cap comnes the small cap, penny cap.
Often we see that some mid caps are giving very high returns. There are some very good companies in mid cap category that are dear to investors. These stocks often have greaty growth potential. there are some who withstand market crash. That’s why the investors love these stocks.
The company fundamentals, cash reserve, business outlook and some other factors decide the stock’s growth. These factors will be discussed below.
As there is no fixed guideline on market cap, we take an approximation. Therefore, the market capitalisation that fall into the category of 5000 crores to 20000 crores can be considered as mid cap stock.
The Mid Cap stocks in India
Mid cap or mid-cap stocks are the stocks which are neither large-cap, nor small-cap, nor penny stocks. The Cap word stands for market capitalisation. Market capitalisation is the price of outstanding shares multiplied by the current share price. SEBI revises the category every six months. After every six months, SEBI recategorizes and promotes or demotes companies from one list to another. In the category of stocks, midcap starts just below the large-cap list of stocks. The list continues until the small-cap list appears.
Reason for picking mid cap stocks
We have chosen the mid-cap stocks because history indicates that there are stocks in this category that withstand market crashes better. Market Index show the state of the stock market. Indices also tell us the market condition, whether it is a bull or bear market or in a consolidation phase. In India, we have Sensex consisting of leading 30 stocks of Bombay Stock Exchange and Nifty consisting of 50 leading stocks of the National Stock Exchange. Nifty and Sensex show the market condition.
These leading stocks are from the large-cap category. When the crash comes, Nifty and Sensex fall down heavily. The leading stocks face the heat. But some stocks in the midcap category, withstand the crash because of their financial strength and business outlook. We will talk about these stocks. In the most recent market crash of 2020, some of the stocks in this category performed well. They withstood the pressure and recovered fast after recovery. The pandemic situation and worsening sentiment of the investors created the crash.
Unprecedented cause of the market crash in 2020
The 2020 stock market crash opened new horizons for the business community. Because we had a worldwide lockdown. In addition to this, all the manufacturing, trading, service and all other business activities stopped working. Due to the pandemic situation, even most of the Government offices stopped functioning. Only the emergency services were running. This was unprecedented in history. Later we saw the Pharma and healthcare sectors started going up when the lockdown was partially lifted. Therefore the cause and recovery process was different, unlike the previous crashes.
The market crash of 2020
Thus the stocks behaved unnaturally. Therefore the recovery came through an unusual path. As a result, Healthcare, Pharma, IT lead the way showing us where the primary business needs lie. This recovery was followed by the financial sector. As the work-from-home process was given precedence, IT got the preference. And also, the fuel price came down drastically. Therefore, industries using imported fuel as their raw material started recovering from the loss first. Because their cash reserve increased. So, they had to spend a lot less on the manufacturing inputs front. Likewise, some other sectors supplying the daily needs like FMCG, Pharma, Healthcare started making profits again. Also, the Government’s policy had a big say in sectoral recoveries.
Cherry-picking the mid cap stocks
Hence we need to carefully cherry-pick some stocks. In mid cap stocks, some mid-caps performed well. Because they managed their business very well during the crash. Their internals helped them recover fast. Therefore we see that investors prefer these kinds of stocks. Let us discuss them.
Why some mid cap stocks perform better than others?
There are various reasons as to why some stocks fare better than the others. And these reasons are related to company fundamentals. Accordingly, the company ratios, the financial ratios, business outlook tell us the truth about these companies. Some of these reasons can be reflected in technical analyses also.
Some key aspects on how to select mid cap stocks
- Growth – Earning growth and revenue are most important factors. Mid cap stocks outperform large and small caps. Because their growth exceeds others in both top and bottom line. The quality of revenue growth is what the investors should look into. If along with revenue growth, the gross and operating margins grow simultaneously, the company is following a high growth curve. In addition, if the company has high free cash flow and low debt, it adds another punch to revenue growth. Also, along with revenue growth, operational growth is a must.
- Financial health – A strong balance sheet indicates good financial health. In addition, a strong balance sheet actually helps the company to overcome market crash or financial stress during a lean business environment easily. Therefore while selecting a mid-cap stock for a long time, the strength in balance sheet must be considered.
- Management quality – This important factor plays a vital role in choosing a mid-cap stock. Mid-caps are often under-researched unlike the large caps and may not have a long history. Therefore gather enough information about the management quality before investing. A good management rune the company more efficiently.
- High Margin business – Look for mid cap stocks that run high margin business. Some moat, lack of competition in the operating sector or operational efficiency give a high margin. Therefore, while selecting a mid-cap, we should look into these advantages in the company business.
- Competitive advantage – This is another important factor. A company enjoying competitive advantages let it grow faster. An investor should also look into this aspect while delving through the nature of business. A company having strong R&D with a proven track record, helps it grow faster. In mid-caps, there are some stocks, that grew faster than others depending on their R&D.
The mid cap stocks picked
Crompton Greaves Consumer Electricals Ltd.
This company was formed through a demerger from its mother company the Crompton Greaves. This company has a new and well-established promoter named Advent. The company has a focus on growth through product diversification and innovation. It has a diverse range of consumer products that include luminaries, light sources, electrical consumer durables and services. it also boasts of some innovative luminaries like antibacterial lights, smart bulbs and the likes.
Thus, this midcap company is set to achieve high growth from product diversification and high consumption growth in rural areas. Innovation and R&D help the company to grow along. The key metrics of the company is given below.
- Market cap – Rs 19381 crores
- Company PE – 38.62
- Sectoral PE – 73.23
- CAGR – 20.99%
- I year return – 18.68%
- PB – 13.06
- Cash Dividend – Rs 3 per share (ex date Nov 3, 2020)
- Dividend Yield – 0.83%
- Free cash flow 2020 – Rs 361.52 crores
- Debt/Equity ratio – 0.24
- ROE – 38.69%
- ROCE – 35.42%
- Operating Profit margin – 13.06%
Polycab India Ltd.
Another addition in this mid cap stocks list is Polycab India Ltd or PIL. According to the 2019 statistics, the cable and wire industry in India is 50000 crores strong, of which PIL enjoys 18% market share in the organised sector. Thus Polycab is one of the leaders in this segment. Also, the promoters of PIL have forty years of experience which helped the company grow better.
PIL has a strong dealer distributor network across India. In addition, the business network is ably supported by 24 manufacturing units at various places. Also, the company has entered into the segment of electrical appliances. However, the lion’s share of company revenue comes from its original business. But the electrical appliance segment is expected to grow fast and earn more revenue for the company. Also, the company exports its products to other countries. Moreover, it is a net debt-free company. In conclusion, the growth prospect is very high in both the top line and bottom line.
At last, let us take a look into the key metrics.
- Market cap – Rs 13,803 crores
- Company PE – 17.72
- Sectoral PE – 28.55
- CAGR – 31.49%
- I year return – 4.28%
- PB – 3.58
- Dividend Yield – 0.75%
- Free cash flow 2020 – Rs -45.49 crores
- Debt/Equity ratio – 0.04
- ROE – 22.35%
- ROCE – 29.34%
- Operating Profit margin – 12.22%
It is the leading tractor manufacturing company in India. Also, Escorts is a very strong company in the midcap group. The company also has a very strong presence in the field of agro-machinery, equipment for the railways and construction equipment. We also find over the past couple of years, its profit margins have increased due to various cost-cutting measures. In addition, collaboration with the Japanese company Kubota is expected to take the growth to a new level. Therefore the company is considered to have high growth potential.
Let us now find what the key metrics of the company tells us.
- Market cap – Rs 16,946 crores
- Company PE – 35.19
- Sectoral PE – 28.12
- CAGR – 20.99%
- I year return – 107.40%
- PB – 5.32
- Dividend Yield – 0.81%
- Free cash flow 2020 – Rs 601.74 crores
- Debt/Equity ratio – 0.02
- ROE – 16.75%
- ROCE – 24.26%
- Operating Profit margin – 11.69%
Dipak Nitrite Ltd.
In continuation to the above stocks, there is another mid cap stock in our list. That is Deepak Nitrite Ltd. It has diversified product range. Its diversification allows it to have presence in three segments, namely Basic Chemicals, Performance Products and Fine & Speciality Chemicals. It is a leading company, has global presence and produce some speciality chemicals that have use in the industries like petrochemicals, colourants, agrochemicals, pharma, rubber, paper. Hence the company enjoys competitive advantages over others in this sector. With the large R&D capabilities it has, the company is expected to grow much faster and maintain its leading position. We see that in the near future it may climb to the large cap section.
- Market cap – Rs 10610 crores
- Company PE – 17.52
- Sectoral PE – 23.57
- CAGR – 37.83%
- I year return – 122.74%
- PB – 6.81
- Dividend Yield – 0.57%
- Free cash flow 2020 – Rs 347.24 crores
- Debt/Equity ratio – 0.7
- ROE – 46.57%
- ROCE – 37.69%
- Operating Profit margin – 24.47%
Relaxo Footwear Ltd
This mid cap stock is in the footwear business for quite a while. Relaxo primarily focuses on non-leather footwear. The promoters of the company have experience in the footwear business for over three decades. In the non-leather footwear sector, it is a leading company. It is operating in a comparatively new category, hence it has a high competitive edge over others.
Initially, RFL started its business as the manufacturer of slippers only. Over the years, innovation and business dynamics have taken the company to a new high. Now, the company has a strong pan India presence through its dealer-distributor network. Relaxo is an established brand in India. In addition, Relaxo has also started selling its products in famous e-commerce platforms like Amazon, Flipkart. Also, branding initiatives helped in revenue growth.
Let us have a close look into the key metrics of RFL.
- Market cap – Rs 19381 crores
- Company PE – 76.9
- Sectoral PE – 73.85
- CAGR – 17.56%
- I year return – 27.30%
- PB – 13.68
- Dividend Yield – 0.18%
- Free cash flow 2020 – Rs 202.80 crores
- Debt/Equity ratio – 0.13
- ROE – 18.73%
- ROCE – 25.69%
- Operating Profit margin – 16.91%
A few important words
In the end, it is necessary to mention that an investor should use his own discretion while investing. the stocks mentioned above are for long term investment. Therefore investors investing in these stocks should keep in mind the time horizon. Also, the number of shares must suit the investor’s personal requirement. One should not overinvest. If the investor wants to invest equally in all the shares, he or she should divide the investment a similar amount of money but not an equal amount of shares. That way the profit/ loss can be adjusted proportionally.