5 midcap stocks are pivoting their business. Should you invest?

This is even more relevant in a country like India. The last few years have seen several policy measures and reforms that have created conducive conditions for Indian businesses to grow rapidly.

There has been a clear focus on improving ease of doing business, simplifying procedures, and creating incentives to enable businesses to take a quantum leap.

Many megatrends have also emerged such as 5G, electric vehicles, and renewable energy sectors.

As a result, many companies have undergone a dramatic shift in their business and strategy to take advantage of these opportunities.

Today we look at the top stocks from the midcap space undergoing a similar shift. Read on to find out why they are worth tracking.

#1 Bharat Dynamics

First on our list is Bharat Dynamics.

The company manufactures guided missiles and allied defence equipment for the Indian armed forces. It also offers product life cycle support and refurbishment for vintage missiles.

It is currently expanding its capabilities to enhance its market position and competitiveness to take advantage of the government’s thrust on indigenous guided weapon systems production.

This has led to healthy order flow and strong financial support from the government in the form of healthy advances for all its orders.

It also has a huge opportunity in exports (Akash SAM, ATGMs, Astra, Torpedoes) driven by rising interest from friendly countries and lower cost on high indigenisation levels.

The company’s order book stands at ₹130 bn giving it strong revenue visibility in the near term. Moreover, it has ₹220 bn worth of orders in the pipeline for the next three to four years.

Bharat Dynamics’ has a robust financial risk profile. The company has no debt on the books and has robust return ratios, with RoCE (return on capital employed) at 25.2% and RoE (return on equity) at 17.6%, as of March 2022.

#2 Galaxy Surfactants

Second, on our list is Galaxy Surfactants.

The company is a manufacturer of surfactants and speciality chemicals. Its impressive clientele includes CavinKare, Colgate, Dabur India, Himalaya, Unilever, and more.

The company is currently expanding its specialty care business to make the most of the premiumisation trend.

Revenue from the segment has grown 5x at a CAGR of 18% since 2010 and today makes up for 39% of the total revenues. The addition of premium specialties like preservatives, mild surfactants, proteins, sunscreens and syndets to the portfolio has aided this revenue growth.

Going forward, the Indian premium home care market is projected to grow at a CAGR of 8.3% for the next 5 years and is projected to make up for 21% of the market from the existing 18%.

As per the company, while 44% of the consumers prefer premium home and personal care brands, 37% of the consumers prefer premium ingredients over premium brands. Cumulatively, these shall drive the premiumisation trend and the need for premium ingredients.

Capex guidance stands at ₹1.5 bn each for the financial years 2023 and 2024. Expansion of products is expected to be across the board, but the focus will mainly be on specialty care products.

While capex spend was sizeable in two of the last three fiscals, steady cash accruals, prudent funding of capex, and efficient working capital management, has enabled the company to keep debt levels under control.

As a result, the company’s debt-to-equity ratio stands at 0.2x. With steady business performance, RoE and ROCE continue to remain strong at 18.3% and 19.5%, respectively, as of March 2022.

#3 Laurus Labs

Third on our list is Laurus Labs.

The company is a fully integrated pharmaceutical and biotechnology company.

It is engaged in the manufacturing a broad portfolio of active pharmaceutical ingredients (API), intermediates, and generic finished dosage forms. It also provides contract research services to the global pharmaceutical industry.

Laurus Labs is growing its volumes for APIs to capitalise on the China Plus One trend.

The Covid pandemic brought about a disruption in the API space in 2020. Apart from the tightening of environmental norms in China, pharma companies all over the world started looking for suppliers that could be alternatives to China (commonly called China Plus One).

Laurus Labs made the most of China Plus One Strategy. There are prospects for large API manufacturing units moving to India, but the certification process takes 18 to 24 months. This has resulted in opportunities for Laurus, which over the last year has increased its vendor base to start making intermediates in India.

Laurus Labs has demonstrated a strong financial track record over the years. The RoE of the company stands at 28.1% while RoCE stands at 26%, as of March 2022.

The capital structure of the company also continues to remain comfortable with debt to equity below 1x. Laurus Labs’ debt to equity ratio remained stable at 0.5x.

#4 Symphony

Fourth on the list is Symphony.

The company is the largest air cooler manufacturer in the world. It manufactures residential, commercial, and industrial air coolers for domestic and international markets.

Symphony is strengthening its moat by intensifying its focus on the industrial and commercial air cooler space. The company has introduced ‘Large Space Venti-Cooling’ (LSVC).

LSCV is a concept that combines cooling with ventilation for large spaces. It is not being offered by any other company at the moment.

Symphony had forayed into the industrial air cooler segment in 2009 and commercial air cooler segment in 2014-15 by gaining the technology through its subsidiaries IMPCO, Mexico and GSK, China respectively.

It has now reoriented its sales & marketing and research & development towards this initiative.

Symphony follows an asset-light model. Hence has minimal debt on its balance sheet. Its debt-to-equity ratio is 0.1x. The company’s RoE stands at 15.1% as of March 2022 while RoCE stands at 17.8%.

#5 IEX

Last on our list is IEX.

The company is India’s first and largest energy exchange. It allows its participants to trade in electricity/power in the block of 15 minutes, intra-day contracts, day-ahead contracts, and daily contracts.

IEX enjoys a monopoly in the energy exchange market with more than 95% market share.

The company over the next decade, aims to cash in on the clean energy megatrend. It recently launched India’s first gas exchange, Indian Gas Exchange, and is working on launching a coal exchange.

Indian Gas Exchange (IGX) now has a total number of 30 participants with the addition of four new members.

Prominent market leaders in the hydro-carbon sector such as BPCL, IOCL, IGL, ONGC, Indian Oil, and Adani Gas among others, have joined IGX as members.

It has also received approval from the Petroleum and Natural Gas Regulatory Board (PNGRB) to commence domestic gas trading on its platform.

This development will help IGX fulfil its commitment to increase the sell side liquidity, along with creating more opportunities for the sale of domestic gas and the discovery of a unique price.

It is also working with the Ministry of Coal to explore options for setting up a Coal Exchange.

IEX has a very high net profit margin which averaged 68.7% in the last three years. As a result, its RoE and RoCE stand high at 51% and 66%, respectively. It is also a debt-free company.

Investment Takeaway…

It’s hard to find a company that doesn’t change over time.

Some changes can be good, some can be bad. But when you’re the one buying or selling stocks, the changes can mean big gains or equally big losses on your investments.

Before investing in any company, make sure you study the fundamentals and growth prospects thoroughly. Since midcap-cap stocks interest you, here’s a proven approach on investing in midcap stocks.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com