Top 5 Midcap Stocks with High RoCE to Add to Your Watchlist

The concept of Return on Capital Employed (RoCE) has become a pivotal metric for investors seeking fundamentally strong companies that efficiently utilise their capital to generate profits.

RoCE not only reflects a company's operational efficiency but also its ability to provide attractive returns to its shareholders.

This article delves into the world of midcap stocks in India, specifically focusing on the top five high RoCE midcap stocks that have caught the attention of investors.

These stocks are not only characterised by their promising financial performance but also their strategic positioning within their respective industries.

By examining their operational excellence, competitive advantages, and growth prospects, investors can gain valuable insights into potential opportunities that align with their investment goals.

Here are the top five.

#1 P&G Hygiene

The first stock on our list is P&G Hygiene.

The company is the Indian subsidiary of the American MNC, Procter & Gamble. It's engaged in the manufacturing and selling of branded packaged consumer goods in the feminine hygiene and healthcare business.

Its portfolio includes popular brands such as Whisper, Vicks, and Old Spice.

P&G Hygiene's RoCE stands at 110% with 3-year average RoCE at 87.34% demonstrating excellent ability in generating returns for its shareholders on its capital.

This is because unlike other FMCG companies, P&G has adopted a hybrid model of manufacturing.

The company outsources its manufacturing in addition to manufacturing products at its two wholly owned facilities in Goa and Himachal Pradesh.

For the March 2023 quarter, the company reported a dip in quarterly sales on Wednesday, as the pandemic-driven demand for healthcare products waned with new Covid-19 cases dropping across the country.

However, it posted a 60.4% YoY increase in net profit at Rs 1.7 bn, helped by tax gains and premiumisation of products.

The company follows the July-June financial year and had reported a net profit of Rs 1 bn in the same period last year.

#2 IRCTC

The second stock on our list is IRCTC.

The company is the only company authorised by the Indian government to provide online railway tickets, catering services, and packaged drinking water at railway stations and trains in India.

Under catering, the company provides mobile catering services on board to 391 trains through pantry or base kitchens.

It also has static catering services at Jan Ahars, cell kitchens, food courts and refreshment rooms at railway stations.

Its travel and tourism segment offers domestic and international tour packages, hotel bookings, car rentals, air ticketing, educational tours, charter train packages, and cruise packages.

The company's return on capital (RoCE) has jumped from 39.7% in 2018 to 63% in 2023, with 3-year average ROCE at 45.4%. IRCTC has healthy cash flow from operations which supports its growth plans. It is also debt free.

For the June 2023 quarter, the company's revenue jumped 17% YoY to Rs 10 bn. However, net profit came in lower by 5% YoY.

Moving forward, IRCTC is all set to boom as demand for setting up railway lines increases.

The company is taking strategic initiatives, such as launching a special train for Sikh pilgrims and expanding its ticketing services, including online booking for helicopter service to Kedarnath Dham.

Furthermore, the company anticipates tourism to improve, led by the increase in travelling and the introduction of new Vande Bharat trains.

These tailwinds, coupled with the growing revenues from advertising and license fees, bode well for IRCTC's long-term profitability.

#3 GSK Pharma

The third stock on our list is GSK Pharma.

The company is a part of GlaxoSmithKline plc (GSK), a British multinational pharmaceutical company headquartered in London.

GSK underwent a merger in 2000 of Glaxo Wellcome and SmithKline Beecham and is the world's sixth-largest pharmaceutical company.

The company's RoCE stands at 38% as of March 2023 with 3-year average RoCE at 34.5%.

For the June 2023 quarter, the company's revenue rose 2.2% YoY to Rs 7.6 bn buoyed by strong demand for its vaccines while net profit rose 11% YoY to Rs 1.3 bn.

The company had a one-off gain from the sale of surplus residential properties worth Rs 173 m, adding to its profit.

Going forward, GSK India is focusing on anti-infectives, vitamins, pain, analgesics, and derma business.

The company aims to touch a billion lives in India over the next five years by driving innovative launches, delivering competitive performance with profitable growth, and remaining rooted in their cultural pillars.

The focus is on growing promoted brands, improving competitiveness, defending performance brands, launching new assets, and creating new categories.

The company recently announced the launch of Shingrix (Zoster Vaccine Recombinant, Adjuvanted) in India, for the prevention of shingles (herpes zoster) and post-herpetic neuralgia in adults aged 50 years and above.

Shingrix is the world's first non-live, recombinant subunit vaccine to be given intramuscularly in two doses. Shingles is caused by the reactivation of the varicella zoster virus (VZV), the same virus that causes chickenpox.

#4 Tata Elxsi

The fourth stock on our list is Tata Elxsi.

The company is one of the leading providers of design and technology services across industries including automotive, media, communications and healthcare.

It was the first few in India to venture into Embedded Product Design (EPD) in 1990s.

Today, the company has gained expertise and is a leading player in this field. EPD is a specialised area in the technology industry that develops ideas into products using technology.

Tata Elxsi's RoCE stood at 58% at the end of the financial year 2023. Its 3-year average RoCE stands at 48.5.

For the June 2023 quarter, Tata Elxsi reported a 17.1% YoY growth in revenue. Net profit stood higher by only 2% YoY as it was impacted by a higher tax rate.

Going forward, the company is confident in its differentiated design and digital capabilities, strong deal pipeline, and growth opportunities in automotive, healthcare, and design businesses.

The demand for software-defined vehicles and automation in the medical devices industry is expected to drive future growth. Tata Elxsi is also leveraging its relationship with Air India for potential opportunities in the aviation industry.

Apart from this the company has ventured into Internet of Things (IoT). Through IoT, the company has created a niche for itself by applying digital technologies such as cloud, mobility, virtual reality, and artificial intelligence, to product design.

With digitalisation becoming the new norm post pandemic, the company has an advantage over its peers in this field.

#5 Vedant Fashions

The last stock on our list is Vedant Fashions.

The company caters to the Indian celebration wear market with a diverse portfolio of brands such as Manyavar, Mohey, and Manthan.

The Indian wedding and celebration market is relatively less price-sensitive compared to casual wear. Thus, the company generates healthy gross margins (over 72%) with no end of season sale or discounts offered on MRP.

As a result, its RoCE stands at 48.9% with 3-year average RoCE at 36.6%.

For the June 2023 quarter, the company reported 4% YoY decline in revenue at Rs 3.1 bn. Net profit came in lower by 10% YoY at 919 m.

Going forward, Vedant Fashions, expects stronger performance in the second half of the year due to the wedding and festive season.

It has seen positive consumer response to Twamev brand and plans to open more Twamev exclusive brand outlets based on pilot store performance.

Why you should invest in high RoCE midcap stocks

Investing in high Return on Capital Employed (RoCE) midcap stocks presents a compelling opportunity for discerning investors.

Midcap companies, nestled between large established firms and smaller startups, often harbor immense growth potential.

Nevertheless, it's important to note that higher returns come with increased risks, given the market's volatility.

Diversifying a portfolio with carefully selected high RoCE midcap stocks can be a prudent strategy.

However, thorough research, a keen eye for innovation, and a long-term perspective are essential.

Investors must exercise caution, stay informed, and seek professional advice when necessary to safeguard their capital and achieve financial goals.

If you're interested in midcap stocks with high RoCE, check out Equitymaster's Screener on the Top RoCE midcap stocks in India.

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

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...