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  • Jun 24, 2023 - Top 5 Midcap Stocks with Consistently Rising Profit Margins

Top 5 Midcap Stocks with Consistently Rising Profit Margins

Jun 24, 2023

Top 5 Midcap Stocks with Consistently Rising Profit Margins

Fundamentally strong midcap stocks have historically given good returns in the long term. Moreover, they strike a perfect balance between low-risk large caps and high-growth small-cap companies.

Identifying the best midcap stocks to invest in can be a little tiring. However, one parameter that you could consider while shortlisting midcap stocks is the operating profit margin and net profit margin.

Expanding profit margins indicate that the company is making more money for each product or service it sells, which is like earning a bigger slice of the pie. This suggests that the company is becoming more efficient or charging higher prices, which is good.

Here are five midcap companies that have expanded their profit margin consistently in the last three years.

These companies have been shortlisted using the Equitymaster screener.

#1 Blue Dart Express

First on the list is Blue Dart.

It's the South Asia's leading courier and integrated air express package distribution company.

Blue Dart offers domestic priority day-definite and time-definite services for critical shipments such as passports, certificates, and other important documents.

It also offers industry-specific services such as temperature-controlled logistics products, especially for the life sciences and the healthcare sector.

Additionally, it has cargo services such as airport-to-airport, interline and charter services.

It introduces DHL import express, a unique single window that takes care of all importing needs.

Blue Dart is a premium market leader in express and parcel delivery in India. It has a market share of around 60% in organized B2B express and a 14% market share in organized surface B2B express.

The company has a network which covers over 55,000 locations in more than 220 countries. It operates six 757-200 Boeing aircraft, 11,000+ vehicles, and 2,113 facilities across the world.

Blue Dart has always focused on generating consistent profits. This is clearly visible from its performance in the past few years.

Profitability and Return Ratios of Blue Dart Express (2018-2022)

  FY18 FY19 FY20 FY21 FY22
Gross profit (Rs m) 3,508 2,839 4,098 6,576 9,634
Gross profit margin (%) 12.5% 8.9% 12.9% 20.0% 21.8%
Net profit (Rs m) 1,447 898 -419 1,018 3,822
Net profit margin (%) 5.2% 2.8% -1.3% 3.1% 8.7%
Return on equity (%) 27.2% 15.5% -8.5% 17.2% 43.8%
Return on capital employed (%) 30.6% 17.6% 8.7% 30.0% 68.7%
Source: Equitymaster

As can be seen, the company's operating profit margin has been on an uptrend since the financial year 2019. The gross profit margin has expanded by 129 basis points, and the net margin expanded by 59 basis points in the last three years.

The primary reason behind this could be revenue growth of 8.6% (compound annual growth rate - CAGR) in the last four years, which was led by a recovery in volumes, strong e-commerce growth, price increases, and passing on the fuel price increase through the fuel surcharge mechanism.

In the last two years, its share price is up 20%.

chart

Blue Dart's growth prospects are quite high given the government's logistics push through its National Logistics Policy, eCommerce policy, and dedicated freight corridor.

It plans to improve its volume by focusing on small and medium-sized enterprises, increasing pin code coverage, reducing costs through innovation, and improving transit time by strengthening its distribution channels.

The company is also experimenting with drone-based delivery services along with Skye Air Mobility.

Going forward, the company's expansion policy, cost reduction initiatives, and government support will drive its revenue and profit growth.

To know more, check out Blue Dart's financial factsheet and latest quarterly results.

#2 Tanla Platforms

Second, on the list is Tanla Platforms.

It's a global A2P (application to person) messaging platform provider enabling businesses to communicate with their customers and intended recipients.

The company is one of the largest communications platform-as-a-service (CPaaS) players in the world, processing more than 800 billion (bn) interactions annually. CPaaS players enable enterprises to send OTPs, transaction alerts, and flight status info to end-users.

Tanla Platforms' customers include some of the big names in the industry, such as Airtel, Vodafone, Facebook, LinkedIn, HDFC Bank, Kotak Bank, Axis Bank, CMAS, Dept of Telecommunications, and Truecaller.

The company business is majorly divided into platform and enterprise business. Under the platform business, the company's products include Wisely, Trubloq, messaging, voice, and IoT (Internet of Things).

In its enterprise business, it offers cloud communication services, two-factor authentication, and omnichannel communications.

Tanla Platforms has grown through a series of acquisitions. Some of its recent acquisitions include ValueFirst India, Karix Mobile, and Gamooga Softtech.

The acquisitions helped the company increase its customer base, expand internationally, cut costs, and improve its financials.

Profitability and Return Ratios of Tanla Platforms (2018-2022)

  FY18 FY19 FY20 FY21 FY22
Gross profit (Rs m) 655 969 1,374 4,347 7,019
Gross profit margin (%) 8.3% 9.7% 7.1% 18.6% 21.9%
Net profit (Rs m) 191 301 -2,095 3,561 5,393
Net profit margin (%) 2.4% 3.0% -10.8% 15.2% 16.8%
Return on equity (%) 2.8% 4.2% -30.3% 40.0% 40.1%
Return on capital employed (%) 1.9% 4.5% -33.0% 46.8% 50.3%
Source: Equitymaster

In the last five years, the company's gross profit margin expanded by 15.2 percentage points. The net margin also expanded by 10.3 percentage points.

Several reasons contributed to this growth, including a spike in revenue and scale of operations, reduction in sales marketing, and general and administrative expenses.

The company's revenue has grown at a CAGR of 27.1% in the last five years, and the net profit grew at a CAGR of 71.6% during the same time.

In the last two years, the company's shares have gained 21%.

chart

Given the growing adoption of the CPaaS platform and an increasing number of digital interactions and UPI transactions, the long-term growth prospects of the company look bright.

To know more, check out Tanla Platforms' financial factsheet and latest quarterly results.

#3 Data Patterns

Third on the list is Data Patterns.

The company is engaged in the business of providing defence and aerospace electronics solutions to the indigenously developed defence products industry.

It has proven in-house design and development capabilities with an experience more than three decades in defence and aerospace electronics.

Data Patterns caters to the entire spectrum of defence and aerospace platforms like space, air, land, and sea.

The company manufactures radars, underwater electronics, an electronic warfare suite, avionics, ATE for defence and aerospace systems, and small satellites.

Some of its key customers include Bharat Electronics Ltd (BEL), Hindustan Aeronautics Limited (HAL), the Indian Space Research Organization (ISRO) and Defence Research and Development Organization (DRDO).

Some of its ongoing projects include the supply of critical products to several prestigious defence projects in India, including the Light Combat Aircraft (LCA), the HAL Dhruv, the Light Utility Helicopter (LUH) and the BrahMos missile programme.

Apart from defence, the company also focuses on space technology and has received orders to build two deep-space surveillance radars from the DRDO.

The company continuously focuses on innovation and has developed several projects, such as cockpit displays and military-grade processor modules, which it used in subsequent projects.

In the last five years, the company's revenue has grown at a CAGR of 28.4%, driven by growth across all revenue segments. The net profit also grew at a CAGR of 74.3% as a result of strong growth in revenue.

As a result, the net margin of the company improved from 5.9% to 27% in the last five years.

The RoE and RoCE currently stand at 17% and 22%, respectively.

Profitability and Return Ratios of Data Patterns (2019-2023)

  FY19 FY20 FY21 FY22 FY23
Gross profit (Rs m) 225 432 920 1,410 2,825
Gross profit margin (%) 17.2% 27.6% 41.1% 45.4% 62.3%
Net profit (Rs m) 77 210 556 940 1,240
Net profit margin (%) 5.9% 13.5% 24.8% 30.2% 27.0%
Return on equity (%) 5.8% 13.7% 26.7% 16.4% 17.0%
Return on capital employed (%) 15.2% 27.1% 40.9% 24.1% 22.0%
Source: Equitymaster

The company's order book currently stands at Rs 9.2 bn and has grown substantially in the past three years.

To cater to the growing order book, the company is expanding its manufacturing facility in Chennai. It includes additional test facilities and adding production lines to the existing facilities.

Given the government's boost towards manufacturing indigenous defence goods in the country through initiatives such as 'Make in India', the growing demand for defence products is driving the company's growth.

The same is reflected in the share price performance as can be seen from the chart below.

chart

Going forward, a high-order book, the company's focus on innovation, and the expansion of its product portfolio will drive its revenue and profit growth.

To know more, check out Data Pattern's financial factsheet and latest quarterly results.

#4 Saregama India

Next on the list is Saregama India.

Established in 1902, the company is one of the oldest music labels in the country. Its business spans music, films, web series, television serials, and retail.

Saregama India is also the largest recording and publishing company in India. It has the largest library of intellectual property rights of over 150 thousand songs, 69 films and web series, and 6,000+ hours of television content.

Despite being a victim of piracy for more than a decade, Saregama India made a comeback in 2017 after its product 'Caravaan' and its production house 'Yoodlee Films' became a hit.

Under the Yoodlee Films banner, it has released 18 movies on multiple OTT platforms such as Netflix, Hotstar, and Zee 5.

It also ventured into live music events and artist management.

Currently, the company is focussing on creating content for regional languages and acquiring music from Bollywood movies.

In the last five years, the company's revenue has grown at a CAGR of 6.1%, driven by strong growth from music licensing and films, events and series business. The net profit has also grown at a CAGR of 28.3% on the back of the growth of its high-margin licencing business.

The net profit margin, as a result, has expanded from 10% to 25% Between 2018-2023.

Profitability and Return Ratios of Saregama (2018-2022)

  FY18 FY19 FY20 FY21 FY22
Gross profit (Rs m) 363 340 605 1,301 1,871
Gross profit margin (%) 10.2% 6.2% 11.6% 29.4% 32.2%
Net profit (Rs m) 283 543 435 1,135 1,526
Net profit margin (%) 7.9% 10.0% 8.3% 25.7% 26.3%
Return on equity (%) 7.4% 12.7% 11.1% 22.5% 11.1%
Return on capital employed (%) 11.1% 21.3% 17.0% 30.8% 15.2%
Source: Equitymaster

Given the improving financial performance, shares of Saregama India have given a return of 53% in the last two years.

chart

The company plans to focus on increasing the number of films and web series it produces with greater emphasis on regional movies and concentrate on reducing costs through scaling up its operations.

This will drive the company's revenue and profit growth in the medium term.

To know more, check out Saregama India's financial factsheet and latest quarterly results.

#5 Indian Energy Exchange (IEX)

Last on the list is Indian Energy Exchange (IEX).

IEX is India's first and largest energy exchange in India with a market share of around 95%.

The company enjoys a monopoly and rules the energy exchange market in India.

IEX is an Indian electronic system-based power trading exchange regulated by the central electricity regulatory commission (CERC).

It has over 7,300 market participants across India, which include power distribution companies, generation companies, and open-access customers.

The company allows participants to deal in day-ahead markets, term-ahead markets, renewable energy certificates, and energy-saving certificates.

It also launched India's first gas exchange, which will enable trading in natural gas. IEX also plans to launch India's first coal exchange.

Coming to its financials, the company has achieved a revenue growth (CAGR) of 10% in the last five years, driven by growth in trading volumes. The net profit has grown at a CAGR of 13.1% during the same time.

The gross and net profit margins stand high at 83.9% and 64.5%, respectively. They have consistently improved from 79% and 57%, respectively, from five years ago.

Its RoE and RoCE stand at 44.6% and 58.9%, respectively While IEX also paid consistent dividends to its shareholders.

Profitability and Return Ratios of Indian Energy Exchange (2018-2022)

  FY18 FY19 FY20 FY21 FY22
Gross profit (Rs m) 1,849 2,028 2,022 2,506 3,696
Gross profit margin (%) 80.2% 79.8% 78.6% 78.9% 85.8%
Net profit (Rs m) 1,317 1,650 1,757 2,054 3,072
Net profit margin (%) 57.1% 65.0% 68.3% 64.6% 71.3%
Return on equity (%) 46.4% 45.4% 46.3% 39.9% 44.6%
Return on capital employed (%) 70.6% 64.0% 59.9% 53.0% 58.9%
Source: Equitymaster

Although the stock gave multibagger returns in the last one year, its performance has been muted as a new player Hindustan Power Exchange (HPX), entered the market in 2022, threatening IEX's monopoly.

Moreover, after the government announced market coupling, IEX share price was under intense pressure. This means IEX will lose the price discovery power as a third party appointed by the government will collect and sell bids and decide uniform prices across all power exchanges.

chart

Though this short term blip may worry investors, the company's growth plans by launching Indian Gas Exchange and Indian Coal Exchange might help it maintain profitability in the medium term.

To know more, check out Indian Energy Exchange's financial factsheet and latest quarterly results.

Snapshot of companies with consistent increase in profit margin on screener

Here's a quick view of the above companies based on their financials.

chart

Please note that these parameters can be changed according to your selection criteria.

This will help you identify and eliminate stocks not meeting your requirements and emphasise those stocks well inside the metrics.

Happy Investing!

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Safe Stocks to Ride India's Lithium Megatrend

Lithium is the new oil. It is the key component of electric batteries.

There is a huge demand for electric batteries coming from the EV industry, large data centres, telecom companies, railways, power grid companies, and many other places.

So, in the coming years and decades, we could possibly see a sharp rally in the stocks of electric battery making companies.

If you're an investor, then you simply cannot ignore this opportunity.

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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...

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