Nifty has peaked, Bank Nifty has peaked, but the mid and small cap indices are far from the highs. What sense do you have of midcaps, small caps and micro stocks as well?
The broader markets probably didn’t perform, but there have been specific stocks and sectors that have performed over the past two or three months. This is also related to the fact that we have seen a greater impact on mid cap earnings. Most of these mid- and small-cap companies suffered a bigger impact on margins this quarter and that’s why some stocks probably corrected somewhat.
In fact, the margin hit was 7-10% over last year or the last two quarters and that’s where there was a slight underperformance. But if you look at the commentary, most companies are looking for a better H2 than H1 and we’ve seen a lot of those commodity prices cool off over the last two quarters. This will have a positive impact on margins in the coming quarters.
The only reason they’ll have slower turnover may be that some of these export-focused companies are having kind of a slowdown in the US, Europe and the UK, but as prices crude and gas cool, these countries will start to do well. That’s where we’ll see some kind of growth coming back for these companies as well as margins in the last quarter of this fiscal year or maybe early next fiscal year.
We have always seen new sectors being added to the midcap space and how things have evolved. What areas of the midcap space look interesting?
If you look at the textile sector, these companies are not in the top 50 or the top 100, but they are still very promising. These companies have borne the brunt of higher cotton prices in the last quarter and likely some downturn in their customers in the US, UK and Europe. As things evolve, this sector looks very promising because there is a lot of government pressure here in this sector.
There are many PLI schemes emerging in the industry. The government probably wants this sector to thrive. Free trade agreements have been signed with various countries such as Australia and the Middle East. We have a couple of free trade agreements with the UK and Europe in the works which will probably be signed in December or January and which will put more emphasis on the sector. I feel like there are a lot of promising companies in these sectors and this is one of the sectors that can probably do well. Other than that, the gas-related sectors are where you would likely see some companies on the CNG side that are probably not doing well.
These are the companies that can do well. Probably CNG, LPG is a sector that can also be looked at. Then there is a sector which is doing very well post Covid and that is the paper sector and it is again the sector which is seeing good tailwinds in terms of price and demand fairly intact.
These are some of the smaller sectors that are not in the top 100 club, but there are many promising companies in these sectors.
You alluded to all the areas where you’re quite optimistic. What are your top picks in these sectors? What stocks can we look at in the paper segment and the other segments you mentioned?
A recurring theme is that companies focused on the domestic market will fare slightly better in the short term compared to companies that derive a greater portion of their revenue from exports.
As for domestic market-oriented companies, one of them belongs to LPG storage and container segment. It’s Aegis Logistics. In the past, this company has done very well as it pioneered and led the LPG storage and dispensing container segment.
There is a lot of demand for LPG in various industries. If you take a closer look at Morbi where more of the ceramic industry chain has started using LPG as an input. Various industries in the glass segment have started using LPG and various other packaging companies have started using LPG as an input.
This company has a JV with one of the world’s largest LPG companies which is Royal Vopak and through this JV they want to spread their wings through various ports in India and they are also getting into the distribution of LPG. Now the distribution business is picking up slightly and that’s why we see the company’s commentary to be very positive for the next couple of quarters based on how they view the container as well as the distribution and storage as well as the distribution business goes. It’s a company that probably looks very promising in the short term as far as the company’s prospects are concerned.
Coming from the paper side,
is another company we love. It is a market leader in the paper segment. The positive friction that happens for paper companies is that the prices of pulp are going up globally and because the prices of pulp are very high, the price of inputs is passed on and that is why the prices of paper are actually in India as well as across the world is trading very high compared to anything we’ve seen in the last quarter.
This company is the leader in the paper industry and its paper business picked up after Covid, schools and offices started to open. They’re seeing a kind of slowdown in the packaging business, but it’s likely to accelerate over the next two quarters.
Disclosures you want to make because you mentioned certain actions?
Some of these companies we have probably recommended to our clients.
Nifty has peaked, Bank Nifty has peaked, but the mid and small cap indices are far from the highs. What sense do you have of midcaps, small caps and micro stocks as well?
The broader markets probably didn’t perform, but there have been specific stocks and sectors that have performed over the past two or three months. This is also related to the fact that we have seen a greater impact on mid cap earnings. Most of these mid- and small-cap companies suffered a bigger impact on margins this quarter and that’s why some stocks probably corrected somewhat.
In fact, the margin hit was 7-10% over last year or the last two quarters and that’s where there was a slight underperformance. But if you look at the commentary, most companies are looking for a better H2 than H1 and we’ve seen a lot of those commodity prices cool off over the last two quarters. This will have a positive impact on margins in the coming quarters.
The only reason they’ll have slower turnover may be that some of these export-focused companies are having kind of a slowdown in the US, Europe and the UK, but as prices crude and gas cool, these countries will start to do well. That’s where we’ll see some kind of growth coming back for these companies as well as margins in the last quarter of this fiscal year or maybe early next fiscal year.
We have always seen new sectors being added to the midcap space and how things have evolved. What areas of the midcap space look interesting?
If you look at the textile sector, these companies are not in the top 50 or the top 100, but they are still very promising. These companies have borne the brunt of higher cotton prices in the last quarter and likely some downturn in their customers in the US, UK and Europe. As things evolve, this sector looks very promising because there is a lot of government pressure here in this sector.
There are many PLI schemes emerging in the industry. The government probably wants this sector to thrive. Free trade agreements have been signed with various countries such as Australia and the Middle East. We have a couple of free trade agreements with the UK and Europe in the works which will probably be signed in December or January and which will put more emphasis on the sector. I feel like there are a lot of promising companies in these sectors and this is one of the sectors that can probably do well. Other than that, the gas-related sectors are where you would likely see some companies on the CNG side that are probably not doing well.
These are the companies that can do well. Probably CNG, LPG is a sector that can also be looked at. Then there is a sector which is doing very well post Covid and that is the paper sector and it is again the sector which is seeing good tailwinds in terms of price and demand fairly intact.
These are some of the smaller sectors that are not in the top 100 club, but there are many promising companies in these sectors.
You alluded to all the areas where you’re quite optimistic. What are your top picks in these sectors? What stocks can we look at in the paper segment and the other segments you mentioned?
A recurring theme is that companies focused on the domestic market will fare slightly better in the short term compared to companies that derive a greater portion of their revenue from exports.
As for domestic market-oriented companies, one of them belongs to LPG storage and container segment. It’s Aegis Logistics. In the past, this company has done very well as it pioneered and led the LPG storage and dispensing container segment.
There is a lot of demand for LPG in various industries. If you take a closer look at Morbi where more of the ceramic industry chain has started using LPG as an input. Various industries in the glass segment have started using LPG and various other packaging companies have started using LPG as an input.
This company has a JV with one of the world’s largest LPG companies which is Royal Vopak and through this JV they want to spread their wings through various ports in India and they are also getting into the distribution of LPG. Now the distribution business is picking up slightly and that’s why we see the company’s commentary to be very positive for the next couple of quarters based on how they view the container as well as the distribution and storage as well as the distribution business goes. It’s a company that probably looks very promising in the short term as far as the company’s prospects are concerned.
Coming from the paper side,
is another company we love. It is a market leader in the paper segment. The positive friction that happens for paper companies is that the prices of pulp are going up globally and because the prices of pulp are very high, the price of inputs is passed on and that is why the prices of paper are actually in India as well as across the world is trading very high compared to anything we’ve seen in the last quarter.
This company is the leader in the paper industry and its paper business picked up after Covid, schools and offices started to open. They’re seeing a kind of slowdown in the packaging business, but it’s likely to accelerate over the next two quarters.
Disclosures you want to make because you mentioned certain actions?
Some of these companies we have probably recommended to our clients.