Time to revisit midcaps? Citigroup picks top 11 stocks that are worth a look

December 02
15:02 2019

L&T Finance Holding stock has corrected around 25 percent in the last six months largely on concerns over its asset quality and real estate exposure.

Citigroup’s recent deep-dive analysis shows that market concerns of developer loan defaults are overdone for LTFH. Most of the IL&FS exposure (Rs 18 billion) is marked in the ‘green’ category.

LTFH benefits from strong parent backing, which provides them better access to funding and supports higher leverage. The company has maintained a positive liquidity gap within all tenors ranging up to one year.

L&T Infotech (LTI) 

LTI has been growing ahead of the market and consistent large deal wins provide visibility. Large client issues, which impacted 1H, seem to be largely behind the company.

For FY20E, LTI appears confident of delivering double-digit growth, with net margins of 14-15 percent. Citi expects the growth rate to improve in FY21E (given that client-specific issues pulled down growth in FY20).

Valuations at ~17x 1-year forward consensus look reasonable given the delivery track record (over the past couple of years) and the company’s positioning in the sector.

The other investor focus is on MindTree (another L&T company in the space) and a potential merger with LTI at some stage.

Phoenix Mills (PML) 

PML continues to benefit from 1) the presence of malls in prime locations 2) experience in setting up, scaling up and operating the malls 3) large size (~1msf per mall) of malls which helps make malls destination for customers.

PML participates in consumption in its malls as it has a revenue share in the revenue of most tenants. Consumption growth, in turn, is a function of both an increase in consumption volume and price inflation.

Once a mall is commissioned, it provides steady EBITDA growth for a long time. PML has a strong balance sheet, steady growth in mall EBITDA, and ample pipeline of new mall assets funded in a low-risk way.

The valuation appears reasonable and it does not build in upside from the above-mentioned 5msf under construction portfolio.

Polycab India 

Polycab has emerged as the market leader in the cable and wires industry and a successful entrant into FMEG space through a mix of large and quality manufacturing base, wide distribution reach, professional management combined with a vision of promoter family, focus on the balance sheet and cash flows and efforts to re-orient the company into B2C mindset.

Citigroup believes that due to a healthy balance sheet, internal cash generation, distribution, brand and execution, Polycab is well placed to capitalise on the growth opportunities in cables, wires and FMEG industries.

The stock is trading at ~18x FY21E EPS, and the global investment bank believes that there is more room for rerating, as the company delivers on FMEG business growth along with further improvement in BS and cash flow.

SRF India 

SRF has not only emerged as the largest manufacturer of refrigerant gases in India but also is seeing strong traction in its specialty chemical business.

Using strong R&D skills in fluorine chemistry, SRF has managed to launch several new generation ref-gases and specialty chemical molecules.

Despite a hiccup in 1QFY20 (due to pollution control issue), SRF is on track to achieve a 40-50% growth in specialty chemicals. The stock is trading at 23x P/E on FY21EPS.

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