5 Most Undervalued Midcap Stocks to Add to Your Watchlist

Editor's note: Midcap stocks are hidden gems of the stock market. They are a perfect blend of both large and small cap stocks, as they are not too big nor too risky. They also have the potential to become future large cap stocks.

Investing in the best midcap stocks can be very fruitful. Historically, midcap stocks have given higher returns than large and small caps.

The three-year returns of the Nifty Midcap 100 index stand at 94.2%, whereas the returns for the Nifty Smallcap 100, and Nifty 50 stand at 72.4%, and 57.2% respectively.

In May 2022, we wrote to you about the most undervalued midcap stocks after the market corrected. Read to find out the latest developments of these companies.

Undervalued Midcap Stocks in India

The last two years were a roller coaster ride for investors on the stock market. Despite such conditions the midcap stocks performed better than largecaps. While the Nifty 50 gave 81% return, the Nifty Midcap 100 gave 126% return in the last two years.

This shows midcap companies are a good investment option in a bull run.

Moreover, after a market correction in 2022, several midcap stocks are trading at attractive valuations. By investing in such undervalued companies, investors can gain from a high margin of safety.

Here are five undervalued midcap stocks that must go into a value investor's watchlist.

#1 Shyam Metaliks & Energy

The most undervalued midcap stock on our list is Shyam Metaliks & Energy, an integrated metal producing company.

The company's current P/E ratio stands at 4.5, while its P/B ratio stands at 1.2. It's trading at a much lower P/E ratio than its peers. The average P/E of the steel industry is 15.93.

Shyam Metaliks primarily manufactures long steel products and ferroalloys. It's also present across the steel value chain by selling intermediate and final products.

The company has a diversified product portfolio, including long steel products, ferroalloys, sponge iron, iron pellets, structural products, and wire rods.

It's one of the largest producers of ferroalloys in terms of installed capacity in India. It has three manufacturing facilities with a total installed metal capacity of 5.71 million tonnes per annum.

The company plans to increase its installed capacity to 11.6 million tonnes per annum by 2025 through organic and inorganic growth.

Shyam Metaliks also has eight captive power plants that generate electricity for its manufacturing plants giving it a cost advantage.

In the last three years, the company's revenue has grown at a compound annual growth rate (CAGR) of 10.8%, driven by capacity addition. The net profit also grew by 9.8%.

In the recent quarterly results, the revenue grew by 51.7% year-on-year (YoY), and the net profit has jumped by 95.7% (YoY). The company also announced a capex of Rs 9.9 bn for 2022 and 2023, in line with its goal to double the capacity by 2025.

Going forward, the revenue growth in the medium term will be driven by capacity addition.

To know more about Shyam Metaliks, check out its factsheet.

Update: The company is planning to diversify its product base by launching aluminium foil, ductile iron pipes, and blast furnace. In line with its plans, the company has commenced production at a newly commissioned aluminium plants in West Bengal and Jharkhand.

In the June 2022 quarter, the company's revenue grew by 31.2% YoY, driven by high volume. However, that didn't translate into good profit growth due to higher raw material expenses.

The net profit declined by 9.7% YoY, and the net margin contracted to 12.8% from 18.6% a year ago.

#2 Manappuram Finance

Next on our list is India's leading gold loan non-banking finance company (NBFC), Manappuram Finance.

Its shares are currently trading at a P/E of 7.2, much lower than the industry average of 27.2.

Manappuram Finance is engaged in offering fund-based and fee-based services such as gold loans, microfinance, vehicle loans, and housing loans. It also ventured into the insurance broking business.

It has a network of 4,637 branches across the country and manages assets worth Rs 272 bn.

In the last three years, the net interest income has grown at a CAGR of 13.2%, driven by higher disbursements. The net profit also grew at a CAGR of 22%, led by the lower lending cost.

In the recent quarterly results, the net interest income slightly declined by 12.3%. The net profit also fell by 46% due to higher provisions. However, the consolidated assets under management (AUM) grew 10% YoY.

The company aims to increase its profits by reducing its operating costs and increasing its collection efficiency.

To know more about Manappuram Finance, check out its factsheet.

Update: In the June 2022 quarter, the net interest income fell 4.5% YoY. Net profit fell by 35.5% YoY, mainly due to the intense competition in the gold loan segment. However, the company's performance has improved from the previous quarter.

#3 CESC

Third on our list is CESC, the flagship company of RP-Sanjiv Goenka Group.

The stock's P/E ratio currently stands at 7.7, while the P/B ratio is 1.04. Its closest competitor, NTPC, is trading at a P/E of 9.5. In contrast, its peers in the industry are trading at an average P/E of 26.2.

CESC is engaged in the business of electricity generation and distribution to more than 3.3 m customers across Kolkata, Howrah, Rajasthan, Maharashtra, and Noida.

It's the sole power distribution licensee in Kolkata and Howrah, with a validity up to 2038.

The company has a 2,500 megawatt (MW) power generation capacity across four power plants. It also has a renewable power capacity of 174 MW across four wind plants and one solar plant.

In the last three years, CESC's revenue has grown at a CAGR of 3.3%. The net profit also grew by 6.5%, driven by its cost-plus nature supporting profitability.

In the recent quarterly results, the revenue and net profit grew by 4.2% and 0.6%, respectively.

Going forward, increased adoption of digital payments and a diversified customer base will improve the company's collection efficiency indicating stable cashflows.

To know more about CESC, checkout its factsheet.

Update: In the June 2022 quarter, the company's revenue grew by 28% YoY due to high collection efficiency while net profit grew by 6% YoY. The cost plus nature of the business has enabled it to increase its revenue in the quarter.

#4 Mazagon Dock Shipbuilders

Fourth on our list is Mazagon Dock Shipbuilders, a leading shipbuilding yard in India.

The shares are currently trading at a P/E ratio of 12.7 and P/B of 2.8. This compared to the average industry P/E of 19.7. The shares of Mazagon Dock looks undervalued.

It's engaged in the business of building and repairing ships, destroyers, warships, tankers, and submarines for the Indian Navy and Indian Coast Guard.

The company has a shipbuilding capacity of 4,000 deadweight tonnage (DWT) and is expanding its capacity by building a new plant in Navi Mumbai.

In the last three years, the revenue of Mazagon Dock declined slightly due to the pandemic. As a result, its net profit also declined, but the company managed to have a net margin of 11.2% in the last fiscal.

In the recent quarterly results, the company's revenue grew 6.3%. The net profit jumped 56.5% due to a strong order book.

Going forward, the company is set to benefit from its strong order book and the government's push towards indigenisation.

To know more about Mazagon Dock Shipbuilders, checkout its factsheet.

Update: In the June 2022 quarter, the company reported the highest ever revenue. Revenue and net profit grew by 81.7% and 113.8% YoY respectively driven by growth in operations. It has also backed two orders to build containers.

The company has also undertaken a major modernization program worth Rs 9 bn to innovate warship construction and improve efficiency.

#5 Motilal Oswal Financial Services

Last on our list is Motilal Oswal, a leading financial services provider.

The company's shares are trading at a P/E of 10.2, which is much lower than the average P/E of 27.2 in the financial services industry.

Motilal Oswal started off as a broking unit and later ventured into asset management services, investment banking, private equity, margin financing, housing finance, and venture capital management.

It has a network of over 2,500 business locations spread across 550 cities serving over 1.6 m customers.

In the last three years, the company's revenue has grown at a CAGR of 12.5%. Net profit also grew by a healthy CAGR of 61.3%, driven by the growth in its broking business.

In the recent quarterly results, the revenue grew by 9.1%. However, the net profit declined by 28% due to a higher provision.

Being among the top 10 brokers in India, the company witnessed robust growth due to higher investor participation in the market in the last few years. Going forward, with higher liquidity in the market, the company is expected to grow its broking business further.

To know more about Motilal Oswal, check out its factsheet.

Update: In the June 2022 quarter, the company completed buyback of shares worth Rs 2 bn.

It also launched a new product 'Option Store' for retail investors to take advantage of options trading.

Coming to the quarterly performance, the revenue and net profit of the company improved by 13% and 40% YoY respectively. This was mainly due to a growth in the broking and capital markets business.

Why should you invest in undervalued midcap stocks?

Midcap stocks are under-researched stocks in the market. As a result, they are usually under-owned.

Hence, they give its investors immense opportunity to unlock their value in the long term. However, they come with a certain risk attached to them. Along they have high growth potential, these stocks are also more volatile than largecaps.

If you are willing to take the risk and invest in sound midcaps for the long term, there are high chances of earning promising returns.

However, before investing in undervalued midcaps, you will have to check for the financials and fundamentals of each company.

Remember that investing in the right stock is not a hard mountain to climb. A little due diligence will guide you in choose the right stock for your portfolio.

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...