Market Outlook 2023: Jefferies upbeat on Midcap sector — Check 5 triggers and 15 stocks to watch out

Market Outlook 2023: The Midcap Index, as well as select stocks from the category, show stellar growth potential amid multiple positive triggers, global brokerage firm Jefferies said in its report on the 2023 sector outlook. From June 2022 lows, the Nifty Midcap 100 has jumped 25 per cent, as against a 19 per cent rise in the Nifty50.  

Jefferies recommends a bottom-up approach in Small and Mid-Cap, with key themes like capital expenditure (Capex) revival, housing demand, and Production-led Incentive (PLI) schemes.

Brokerage lists five top factors that would drive growth in the Midcap sector and in some select stocks:

Midcap Performance:

Softening commodities and better earnings visibility have aided the NSE Nifty50 and Nifty Midcap index from June 2022 lows. FY22 Return on Equity of Nifty was 15 per cent higher than that of Nifty Midcap at 11 per cent.

However, over FY22-25E, prospects of RoE expansion appear higher in Midcaps around 320 basis points (bps) upside, against over 60 bps in Nifty50, indicating signs of margins bottoming and earnings revival.

Commodities Turning Favourable:

Polyvinyl Chloride (PVC) prices have seen a growth of around 9 per cent month-on-month in December 2022 to $850 per metric tonne. This could improve the near-term operating margins of Supreme Industries, Finolex Pipes, and Astral, led by waning inventory losses.

Also, LME copper has risen by 13 per cent in the December-end quarter of this fiscal (Q3FY23), which would likely bode well for operating margins of cables and wires companies like Polycab, Finolex Cables, and V-Guard Industries.

Besides, the crude oil correction of around 23 per cent in the second half will likely soften natural gas prices in 2023, which augers well for Kajaria Ceramics.

Capex Revival and Housing to Drive Volumes:

With the economy resuming post-Covid, the uptick in capex and housing appears to be gaining pace. While the government’s budgetary allocation for infra/capex has risen notably in 2022, private capex is on an upward trajectory.

PLI Tailwind:

Indian electronics manufacturing services industry is projected to reach $135bn by FY26, as cited by Dixon, implying a 30 per cent Compound Annual Growth Rate (CAGR) of over $36bn in FY21. Indian labour cost is one-third that of China. PLIs provide opportunities for exports and backward integration.

Dixon Tech is a recipient of five PLI approvals, whereas Amber Ent has two PLI approvals. However, a relative slowdown in mobile and durable sales is likely to weigh on near-term top-line growth.

Graphite Electrodes - Key Risks:

The impact of rising interest rates on construction/infra and volatility in European energy costs would likely be key risks for Graphite India and HEG in 2023.

Over FY22-25E, the brokerage estimates HEG's sales/PAT CAGR 27/38 per cent to outpace Graphite 13/23 per cent, respectively, as the latter’s German production could be impacted by volatility in energy costs.

Top Picks:

Jefferies prefers strong brand franchises that demonstrate good margin resilience.

1) Supreme Inds - Margin uptick likely from FY24e with PVC stabilizing; 40 per cent value-added mix.

2) Polycab: Solid execution despite softening copper; focus to improve Fast-Moving Electric Goods (FMEG).

3) Kajaria Ceramics - Focus on exports by Morbi to aid domestic demand and pricing stability.

4) Crompton - Healthy margins in core business; potential synergies from Butterfly integration.