Most Profitable Midcap Stocks to Watch Out for in 2023

The year 2022 was filled with uncertainties.

From the third wave of Covid to the war between Russia and Ukraine, inflation, interest rate hikes, and supply disruptions, 2022 saw it all.

The markets couldn't digest all this well. Both Sensex and Nifty 50 saw muted growth in the last year.

Many companies also saw their margins fall drastically. However, despite the chaos, some midcap companies saw their margins improve.

Here are five of them.

#1 Power Finance Corporation

First on our list is, surprisingly, a public sector undertaking (PSU) company, Power Finance Corporation (PFC).

For the financial year 2022, the company reported a net profit of Rs 140.5 billion (bn), higher by 18.3% YoY. This was due to lower provisions on the back of an improvement in asset quality and increased net interest income.

The company also declared its highest-ever dividend of Rs 12 per share for the year. PFC has consistently paid dividends since 2007, except for 2019.

It is one of the stocks with a high dividend yield, with a five-year average of 6.7%.

As can be seen from the table below, PFC's performance across all metrics, including net interest income, non-performing assets (NPA), and return on equity (RoE), has improved in the last five years.

Power Finance Corporation Financial Snapshot (2018-2022)

Rs m	FY 18	FY 19	FY 20	FY 21	FY 22
Net Profit	66,887	99,209	71,221	1,17,478	1,40,148
Net Profit Margin (%)	13.8%	18.4%	11.3%	16.4%	18.3%
Net interest income	1,83,039	1,91,724	2,19,848	2,70,060	3,19,287
Growth (%)		4.7%	14.7%	22.8%	18.2%
Advances	49,48,896	57,36,613	64,61,961	72,23,868	73,28,508
Growth (%)		15.9%	12.6%	11.8%	1.4%
Return on Equity (%)	16.8%	21.1%	14.4%	19.3%	19.6%
Return on Assets (%)	1.3%	1.6%	1%	1.5%	1.8%

Source: Equitymaster

Though the company's advances have grown marginally by 1.4% in the financial year 2022, it has diversified into funding projects in irrigation, e-mobility, and energy storage, paving a path for future growth.

This Maharatna company is set to surpass its 2022 profit number as it reported a consolidated profit of Rs 90,088 m for the first two quarters of financial 2023.

The market has also factored in this growth, and PFC's shares have risen by over 100% in the last 20 months.

Going forward, it stands to benefit from government initiatives to meet the increased demand for electricity.

#2 Steel Authority Of India

Second on the list of most profitable stocks is another Maharatna company, the Steel Authority of India (SAIL).

The company reported a net profit of Rs 122 bn for the year ended March 2022. This is a 195.2% increase from the previous year's net profit of Rs 41.8 bn.

The primary reason behind such high growth is an increase in realisations and a 37% decline in interest cost due to the pre-payment of debt.

During the year, SAIL reduced its total debt by 62.3% to Rs 135 bn driven by growth in sales volume. It also achieved the highest-ever sales of 16.2 metric tons (MT) in the financial year 2022.

India's largest steel company has consistently improved in all metrics in the last five years.

Steel Authority of India Financial Snapshot (2018-2022)

Rs m	FY 18	FY 19	FY 20	FY 21	FY 22
Revenue	5,65,691	6,74,681	6,25,700	6,99,743	10,43,354
Growth (%)		19.3%	-7.3%	11.8%	49.1%
Operating Profit	46,620	93,721	94,440	1,32,649	2,14,062
Operating Profit Margin (%)	8.3%	14%	15.3%	19.2%	20.7%
Net Profit	-5,663	21,258	19,264	41,481	1,22,435
Net Profit Margin (%)	-1%	3.2%	3.1%	6%	11.8%
Debt-to-Equity (x)	0.8	0.8	0.8	0.4	0.2
Return on Equity (%)	-1.5%	5.4%	4.6%	9.1%	22.6%
Return on Capital Employed (%)	3%	9.2%	8.7%	15.4%	27.3%

Source: Equitymaster

For 2023, the company might not be able to top 2022 figures as, so far, it has reported a net profit of Rs 2,160 m for the two quarters. This includes a loss of Rs 4,455 m due to an export duty levied by the government. The profitability was also affected due to the volatility in the prices of coking coal.

However, SAIL's performance is expected to improve on the back of moderation in coal prices and a pick-up in post-monsoon construction activity.

The demand for steel in the post-pandemic era has gone up. As the largest steel company in India, SAIL is a primary beneficiary, and markets have reacted positively to this. In the last three years, SAIL's shares have given multibagger returns of 334%.

Going forward, the company's modernisation and expansion initiatives are expected to drive its revenue and profit growth in the medium term.

#3 REC

Next on the list is REC.

In the financial year 2022, the company reported a net profit of Rs 100.4 bn. It reported a net profit of Rs 83.8 bn in the previous year.

This was mainly driven by the growth in total interest income and a decline in borrowing costs and operating costs.

REC's net interest income grew by 22% to Rs 172.3 bn from Rs 140.6 bn a year ago.

In the last five years, the company has delivered a healthy performance. The net interest income and net profit have grown at a compound annual growth rate (CAGR) of 13.1% and 17.7%, respectively. This was on the back of higher loan disbursements.

REC Financial Snapshot (2018-2022)

Rs m	FY 18	FY 19	FY 20	FY 21	FY 22
Net Profit	44,505	57,414	49,723	83,782	1,00,357
Net Profit Margin (%)	19.6%	22.6%	16.6%	23.6%	25.5%
Net interest income	93,170	97,418	1,09,544	1,40,610	1,72,280
Growth (%)		4.6%	12.4%	28.4%	22.5%
Advances	22,88,783	27,04,509	31,20,835	36,52,615	37,19,305
Growth (%)		18.2%	15.4%	17%	1.8%
Return on Equity (%)	13.7%	16.6%	14%	19.1%	19.6%
Return on Assets (%)	1.8%	1.9%	1.4%	2.1%	2.4%

Source: Equitymaster

This Navaratna company also enjoys strong support from its parent company, PFC, and is the nodal agency for the government's Revamped Distribution Sector Scheme (RDSS).

Being a primary beneficiary of the government's new scheme, REC has an opportunity to grow its loan book.

For 2023, the company reported a combined net profit of Rs 51.8 bn and is set to surpass its 2022's profit numbers.

The markets have not ignored this, which resulted in an increase in REC's share price by 45% in the last three years.

REC also has the highest dividend yield among the midcaps. Its five-year average dividend yield is 9.6%. It has consistently paid dividends since 2008.

Going forward, continued sovereign and parent company support will drive REC's growth in the medium term.

#4 Hindustan Petroleum Corporation

Fourth on our list of most profitable midcaps is Hindustan Petroleum Corporation Limited (HPCL).

For the year ended 2022, it reported a net profit of 58.4 bn. This was on the back of growth in sales volumes by 6.8% from the previous year.

The company's total revenue also grew by 65.3% to Rs 3.2 trillion (tn) from Rs 1.9 tn in 2021.

During the financial year 2022, the company was among the top three oil marketing companies, with a market share of approximately 18%.

However, in 2022, HPCL's operational performance slightly took a hit, and its capacity utilisation was 88.4%, as against 100% the previous year. This was mainly due to a fire breakout in one of the refineries.

Hindustan Petroleum Corporation Financial Snapshot (2018-2022)

Rs m	FY 18	FY 19	FY 20	FY 21	FY 22
Revenue	19,63,167	25,52,121	25,21,226	19,85,627	32,81,383
Growth (%)		30.0%	-1.2%	-21.2%	65.3%
Operating Profit	1,06,815	1,15,273	46,596	1,60,034	1,02,443
Operating Profit Margin (%)	5.5%	4.5%	1.9%	8.2%	3.1%
Net Profit	58,967	57,609	30,969	1,05,242	58,362
Net Profit Margin (%)	3%	2.3%	1.2%	5.4%	1.8%
Debt-to-Equity (x)	0.4	0.4	0.7	0.7	0.8
Return on Equity (%)	23.1%	18.9%	10%	27.6%	14.1%
Return on Capital Employed (%)	26.7%	23.3%	5.5%	23.8%	11.8%

Source: Equitymaster

For the first half of the financial year 2023, the company reported a combined net loss of Rs 124,550 m. This was mainly due to the high crude price that put pressure on the company's marketing margins.

This didn't bode well with the investors, and the share price of HPCL was affected.

HPCL completed the capacity expansion of its Mumbai plant in the financial year 2022 and planned to complete the expansion and upgradation at the Visakh refinery in the current financial year.

The capacity expansion and upgradation are expected to improve the revenue growth and profitability of refining operations in the medium term.

#5 Jindal Steel & Power

Last on the list is Jindal Steel & Power.

For the year ended 2022, the company reported a net profit of Rs 82.9 bn, higher by 50% YoY. This was mainly driven by favourable demand and elevated steel prices.

The company's total revenue also grew by 27.1% in the last year, driven by volume growth.

During the last five years, Jindal Steel & Power's revenue has grown at a CAGR of 11%. It also reported a net profit of Rs 82 bn as against a loss of Rs 16 bn five years ago.

The company's integrated business operations have helped improve its efficiency and hence its profits over the years.

Jindal Steel and Power Financial Snapshot (2018-2022)

Rs m	FY 18	FY 19	FY 20	FY 21	FY 22
Revenue	2,71,223	3,54,608	2,67,482	3,59,861	4,57,316
Growth (%)		30.7%	-24.6%	34.5%	27.1%
Operating Profit	58,818	68,753	67,053	1,31,993	1,36,352
Operating Profit Margin (%)	21.8%	19.5%	25.1%	37.5%	30.1%
Net Profit	-16,242	-24,115	-5,737	55,269	82,846
Net Profit Margin (%)	-6%	-6.8%	-2.2%	15.7%	18.3%
Debt-to-Equity (x)	1.1	0.9	0.9	0.6	0.2
Return on Equity (%)	-5.3%	-7.5%	-2%	17.4%	23.3%
Return on Capital Employed (%)	3.5%	2.5%	5.6%	20.2%	27.1%

Source: Equitymaster

For 2023, Jindal Steel & Power might not be able to top its 2022 numbers. In the first two-quarters of the current fiscal, the company reported a combined net profit of Rs 22.1 bn.

High raw material prices and high export duties have led to moderation in profits. However, the government removed export duty on steel and iron ore in November 2022, which can lead to higher margins for Jindal Steel and Power.

Though the company has a high promoter holding of 61.2%, the promoters have pledged 40.8% of shares.

But the company has been deleveraging its balance sheet, and the debt to equity has come down from 1.1x to 0.2x in the last five years.

Coming to the stock performance, the shares have given a 127% return in the last two years.

Going forward, Jindal Steel and Power's expansion plans and high demand for steel will drive its revenue and profits in the long term.

Some more profitable midcaps

Apart from the above, here are a few more midcap stocks which reported a good profit in 2022.

Company	FY 18	FY 19	FY 20	FY 21	FY 22
Canara Bank	-39,514	6,019	-19,864	28,906	61,248
Oil India Ltd.	19,328	20,869	39,487	36,178	66,074
Union Bank Of India	-52,125	-29,223	-31,209	28,634	52,653
Hindustan Aeronautics Ltd.	19,764	23,276	28,756	32,407	50,801
Adani Power Ltd.	-20,738	-9,844	-22,748	12,700	49,116
Exide Industries Ltd.	6,941	8,474	7,625	7,334	6,943
Bajaj Holdings & Investment Ltd.	26,548	30,484	29,920	36,498	40,557
Muthoot Finance Ltd.	18,298	20,780	31,382	38,044	40,166
NHPC Ltd.	27,848	28,306	33,419	36,054	37,757

Data Source: Ace Equity

Meanwhile, these midcap stocks have reported the highest combined profit for the first two quarters of 2023.

Company	Q1 FY23	Q2 FY23	Total
Jindal Steel & Power Ltd.	-4,732	66,231	61,499
REC Ltd.	27,284	24,473	51,756
Power Finance Corporation Ltd.	29,988	21,095	51,083
Canara Bank	25,255	20,220	45,475
Union Bank Of India	18,477	15,585	34,062
Oil India Ltd.	17,205	15,555	32,760
General Insurance Corporation of India	18,599	6,897	25,497
NHPC Ltd.	12,730	10,217	22,947
Shriram Finance Ltd.	10,669	9,653	20,321
Hindustan Aeronautics Ltd.	12,092	6,067	18,159

Data Source: Ace Equity

Since midcaps interest you, checkout the 10 Most Undervalued Midcap Stocks for 2023.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...