Investing in Midcap Stocks: A Look at Mutual Funds' Top 5 Picks of 2023

Earlier this week, we wrote about the top 5 stocks Indian mutual funds bought and sold in 2023.

The article highlighted stocks from all the categories - smallcaps, largecaps, and midcaps.

Today, we will specifically focus on midcaps.

In a volatile market like the current one, midcap stocks have defied the odds, reporting an impressive performance.

As midcap stocks are smaller than largecaps, they are believed to have immense growth potential. This gives them more room for expansion.

The growth potential is what makes mid-cap stocks a perfect choice for investors looking for a balance in the present market volatility.

So, let's look at the top mid-cap stocks that Indian mutual funds have bought in the first two months of 2023.

#1 Phoenix Mills

First on the list is a real estate company - Phoenix Mills.

Nomura India Investment Fund, on 14 February 2023, bought a total of 2.4 million (m) shares, amounting to a 1.39% stake in Phoenix Mills, as per the bulk deal data.

The shares were purchased at an average price of Rs 1,310 a piece on both exchanges, taking the aggregate value to Rs 3.3 billion (bn).

Meanwhile, HDFC Mutual Fund on 14 February 2023 acquired 0.3 m shares of Phoenix Mills at an average price of Rs 1,860 per share.

Indian mutual funds have been bullish on the company for the past two quarters.

In June 2022, they held a 15.8% stake which stood at 17.6% at the end of the December 2022 quarter.

Phoenix Mills Shareholding Pattern

Quarter ending	Mar-21	Jun-21	Sep-21	Dec-21	Mar-22	Jun-22	Sep-22	Dec-22
Mutual Funds holding (%)	15.3	14.9	16.9	17.6	16.3	15.8	16.4	17.6

Source: Equitymaster

According to the latest shareholding pattern of Phoenix Mills, DSP Midcap fund is the largest shareholder among Indian mutual funds, with a 2.63% stake or 4.6 m shares.

The bullishness by mutual funds towards the company is justified on many parameters.

Being the largest mall owner in India, Phoenix Mills is the leading retail mall developer and operator with approximately 6 m square feet of retail space spread across eight malls.

With underdevelopment assets worth Rs 2 bn in the retail segment, it is also among the top real estate stocks in India which stands to benefit as the sector enjoys tailwinds.

The company has reduced debt substantially over the past five years, with its current debt to equity ratio coming in at 0.5x.

Going forward, the company expects to expand its operational mall space in retail to about 13 m square feet by the financial year 2026.

It aims to grow its commercial portfolio from 2 m square feet, more than three-fold to about 7.1 m square feet.

The company also plans to add another 400 rooms with the addition of the Grand Hyatt at Bengaluru.

For more details about the company, see the Phoenix mill company fact sheet and quarterly results.

#2 Coforge

Second on the list is Coforge.

Through a bulk deal earlier this week on 13 February 2023, Nomura India Investment Fund upped its stake in Coforge by buying 0.6 m shares at Rs 4,050 as per the NSE data.

The exchange data further showed that Aditya Birla Sun Life Mutual Fund (MF) raised its stake in Coforge by buying 346,076 shares at Rs 4,050 apiece, whereas Kuwait Investment Authority bought 0.4 m shares at Rs 4,049 apiece.

Since June 2021, Indian mutual funds have remained bullish on the IT company as can be seen from the table below.

Coforge Shareholding Pattern

Quarter ending	Mar-21	Jun-21	Sep-21	Dec-21	Mar-22	Jun-22	Sep-22	Dec-22
Mutual Funds holding (%)	9.3	11.5	14.4	14.4	19.3	18.9	20.1	19.9

Source: Equitymaster

The reduction in December 2022 quarter can be due to a sharp correction in Indian IT stocks and partly due to concerns about a prolonged slowdown in US IT spending.

According to the latest shareholding of Coforge, Axis Mutual Fund is the largest shareholder among Indian mutual funds, with a 6.2% stake or 3.7 million (m) shares.

Fund managers' recent bet on Coforge comes at a time when Coforge has signed the largest number of large deals in a quarter in its history. The order intake at US$ 345 million (m) has been the highest ever.

Over the years, Coforge has been a market leader in product engineering, leveraging cloud, and data integration, to transform client businesses into intelligent, high-growth enterprises.

It has consistently improved its offerings portfolio by investing in digital technologies like artificial intelligence, customer experience, data and analytics, product engineering, and cloud.

The company's acquisition of SLK in 2021 have it access to banking clients, while its capability-based acquisitions of Whishworks in 2019 and RuleTek in 2017 have improved its competitive positioning.

Increased offshoring components in recently won large deals, further moderation in industry-low attrition rates, and improved utilisation would improve Coforge's margins in the financial year 2024.

For more details about the company, see the Coforge company fact sheet and quarterly results.

#3 Aarti Industries

Third, on the list is Aarti Industries.

After remaining bearish on the specialty chemical company for the past couple of quarters, mutual funds have bought into the counter in 2023.

The bearish sentiment displayed by mutual funds could be due to falling profits of chemical companies due to rising crude oil prices and disruptions in supply chain, increasing raw material costs.

Aarti Industries Shareholding Pattern

Quarter ending	Mar-21	Jun-21	Sep-21	Dec-21	Mar-22	Jun-22	Sep-22	Dec-22
Mutual Funds holding (%)	10.9	8.8	8.4	7.4	7.3	6.7	6.7	6.3

Source: Equitymaster

Investors in Aarti Industries would sigh some sort of relief as domestic mutual funds are finding value in the company.

Mutual funds are also bullish on Aarti Pharmalabs, a 100% subsidiary of Aarti Industries.

Here's data showing names of fund houses and the exposure they have taken.

Fund name	Market value as on Jan 2023	No of units (Jan 2023)
DSP Mutual Fund	Rs 2.3 million	4,250
IDFC Mutual Fund	Rs 4.1 million	7,650
Kotak Mutual Fund	Rs 21 million	39,100
Nippon Mutual Fund	Rs 70.9 million	1,31,750
SBI Mutual Fund	Rs 0.9 million	1,700

Data Source: PersonalFN

The bullish view on the company can be due to cooling raw material prices and stabilising supply chain issues.

The company has started ramping up its capacities across all product lines to take advantage of the growing demand for speciality chemicals and fill the gap of the slowdown of production in China.

The demand is also expected to be aided by the government's Atmanirbhar Bharat Abhiyan to reduce the dependence on imports for chemicals and make India more self-reliant.

Being the largest producer of benzene-based chemicals and derivatives, with a market share of 25-40% for various products, Aarti Industries enjoys high economies of scale and hence low cost of production.

Moreover, it also has a strong pipeline of over 90 products in the chemicals and pharmaceutical segment, and it also has a monopoly in manufacturing several chemicals.

Going forward, the capacity expansion across product lines, diversified revenue profile, and low cost of manufacturing is expected to drive the revenue and margins of the company.

For more details about the company, see the Aarti Industries company fact sheet and quarterly results.

#4 MRF

Fourth on the list is MRF.

Through a bulk deal in January 2023, SBI Equity Hybrid Fund upped its stake in MRF by buying a 1.1% stake or 3,907 shares, constituting 0.1% of the paid-up equity of the company.

The exchange data further showed that Kotak Emerging Growth fund raised its stake in India's highest priced stock by buying 2,000 shares, taking the total holding in the company to 1.2%.

Skip forward to February 2023, SBI Mutual fund earlier this week acquired 5,176 shares of MRF.

Take a look at the table below to see how mutual fund holding in MRF has varied over the past few quarters.

MRF Shareholding Pattern

Quarter ending	Mar-21	Jun-21	Sep-21	Dec-21	Mar-22	Jun-22	Sep-22	Dec-22
Mutual Funds holding (%)	7.7	7.5	6.8	6.9	5.9	6.2	7.2	6.6

Source: Equitymaster

This bearish sentiment in the December 2022 quarter was due to disappointing September 2022 results, where the company reported a fall of 32% in profits.

The recent bullish sentiment on India's highest priced stock comes after prices of crude oil and rubber, both key raw material components for tyre companies, have fallen to multi-year lows. Crude oil prices slipped 10%, while natural rubber prices have fallen 24%.

The industry outlook remains strong with rising demand.

Besides, a huge export opportunity is knocking on the doors of the Indian tyre industry. Several factors are at play in MRF and the tyre sector's favour.

The faster recovery from the pandemic, stringent anti-dumping duties, and China plus one market policy of many countries are prominent among them.

For more details about the company, see the MRF company fact sheet and quarterly results.

#5 Zomato

Last on the list is Zomato.

In January 2023, mutual funds bought a whopping 34.7 m shares of the food delivery company. Talk about bullishness!

Mutual funds could be of the view that Zomato is fairly priced at the current valuations.

ICICI Prudential Value Discovery Fund was the highest buyer with 16 m shares in January 2023.

Meanwhile, BNP Paribas Mutual Fund was among the top new additions in Zomato as the AMC bought Zomato shares worth Rs 94.5 m.

Zomato Shareholding Pattern

Quarter ending	Jun-21	Sep-21	Dec-21	Mar-22	Jun-22	Sep-22	Dec-22
Mutual Funds holding (%)	3	4.4	3.9	2.8	2.4	4.6	5.6

Source: Equitymaster

What explains the bullishness of mutual funds towards a loss-making company like Zomato?

Being one of the top players in the growing food delivery ecosystem, Zomato enjoys a strong first-mover advantage.

A strong brand value, a pan-India presence, and a growing delivery partner network have helped the company grow its orders.

As a result, its revenue has also grown by a CAGR of 19.3% over the last three years. The losses have also contracted by almost 50% during the same time.

The company's growth prospects look good as the food delivery ecosystem is here to stay.

Improving fundamentals, growing customer and restaurant base, and expanding to new cities are primary growth drivers for the company.

With the recent fall in Zomato share price, mutual funds could be of the view that this is the right time to look at a fallen angel like Zomato.

For more details about the company, see the Zomato company fact sheet and quarterly results.

So there you go...a list of midcap stocks where Indian mutual funds have turned bullish.

Remember that it is important to do your due diligence before investing in a company.

As you are interested in midcaps, check out the below video where Co-head of Research at Equitymaster Rahul Shah talks about 3 mid-cap stocks to ride the boom in India's manufacturing sector.

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...