5 Most Undervalued Midcap Stocks to Watch Out as 2024 Begins

Investing in midcap stocks can be very exciting.

However, investors often fail to realise that the most important thing is to analyse their underlying business.

Look for a fundamentally strong business that has been around for a while. Something with a history of robust earnings in tandem with a healthy balance sheet.

Even then, you don't want to overpay.

Buy the stock when it is trading at a discount to its fair value. This discount acts as a margin of safety.

On the off chance the business doesn't do well, the margin of safety acts like an airbag. It cushions the blow.

With that in mind, let's look at the five most undervalued midcap stocks in India, that can bounce back in 2024.

These stocks were filtered using Equitymaster's Indian stock screener.

#1 Galaxy Surfactants

First on our list is Galaxy Surfactants.

The company is a leading manufacturer of surfactants and other speciality chemicals in India.

Surfactants are speciality chemicals used in household and personal care, industrial, and institutional cleaning products.

Around 43% of the company's sales come from the domestic market, whereas the balance 57% comes from overseas.

Over the years, the company has become a preferred supplier to leading MNCs (54% of revenues), regional (12%), and local FMCG brands (34%).

Galaxy Surfactants Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	13.49%	-6.13%	7.39%	32.29%	20.46%
Operating Profit Margin (%)	12.96%	14.44%	16.51%	11.21%	13.01%
Net Profit Margin (%)	6.91%	8.87%	10.85%	7.13%	8.57%
Return on Capital Employed(%)	27.38%	23.92%	25.63%	19.50%	24.16%
Return on Equity (%)	23.94%	23.70%	25.51%	18.28%	22.04%

Data Source: Ace Equity

This status explains the solid track record of growth, with sales and profits nearly doubling in the past five years, between 2019-2023.

The returns have also been strong, with the Return on Equity (RoE) and Return on Capital Employed (RoCE) averaging at 22% and 24%, respectively.

Despite its leadership status and robust growth, the stock has been trading at a price to earnings (PE ratio) of 28.4 times, close to its 3-year historical median multiple of 33.6 times.

Over the last few quarters, the total sales and profits have been on a downward trend. For the nine months ending September 2023, total sales and net profits are down 16% and 14%, respectively, in comparison to the same period last year.

This comes on the back of a weak demand sentiment from the company's international markets.

Despite a slump in sales, the profit margins have inched up, thanks to the increased focus on high-margin products.

Going forward, the company is confident of a strong recovery led by easing raw material prices, freight rates and recovery in developing markets and North America (a key market).

All of this in tandem with the company's strong fundamentals suggest that it is well-positioned for long-term growth.

To know more about the company, check out its financial factsheet and latest financial results.

#2 Amara Raja Energy & Mobility

Next on our list is Amara Raja Energy & Mobility .

Amara Raja Energy & Mobility is a leading manufacturer of industrial and automotive batteries in India.

The company is a market leader in the telecom and data centres sectors, with a leading automotive battery brand, Amaron, in tow.

It is the preferred supplier to major telecom service providers, telecom equipment manufacturers, UPS sector (OEM & replacement), Indian railways to power, oil & gas etc.

Amara Raja Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	NA	0.78%	4.98%	21.26%	19.43%
Operating Profit Margin (%)	14.70%	16.87%	16.83%	12.27%	13.39%
Net Profit Margin (%)	7.11%	9.66%	9.05%	5.71%	6.44%
Return on Capital Employed(%)	21.72%	24.04%	22.25%	16.01%	19.60%
Return on Equity (%)	14.49%	18.91%	16.45%	11.70%	14.10%

Data Source: Ace Equity

Between 2020-2023, the business growth has been rangebound. The sales and net profits both have grown at a 5-year CAGR of 11%.

The 5-year average RoE and RoCE stands at 15% and 20%, respectively.

The stock is available at a PE of 14.4 times, a 15% discount to its 3-year median PE of 16.6 times. A large part of the reason is the subdued growth in the past few years led by the advent of the EV market.

However, the company is transforming into a new energy player. It is establishing a giga factory to produce batteries for electric vehicles (EVs) at scale.

It is also investing in startups that are developing innovative battery technologies. These moves are part of the company's strategy to future-proof its business and capitalize on the growth of the EV market.

Given the company's well-capitalised balance sheet and promising outlook, one might question whether its current stock valuation is accurate.

To know more about the company, check out its financial factsheet and latest financial results.

#3 Affle (India)

Third on our list is the ad tech giant Affle India.

It's a leading mobile marketing and advertising technology company that helps companies advertise.

It transforms advertisements into recommendations, with the help of artificial intelligence (AI).

The goal is to help marketers identify, engage, acquire, and drive transactions with their potential and existing users.

Despite its leading status, the stock has not been immune to the pessimism in the market towards IT stocks. Underperforming the broad index, it trades at a PE of 56 times, a 22% discount to its 3-year median PE of 72 times.

What's surprising is that the discounted valuation comes despite a strong performance in the past.

The business has been growing well, led by several acquisitions and rising mobile penetration in the country.

Affle India Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Operating Profit Margin (%)	28.35%	28.16%	33.13%	26.33%	19.80%
Net Profit Margin (%)	19.58%	19.63%	26.13%	19.85%	17.10%
Return on Capital Employed (%)	74.46%	43.09%	39.44%	27.95%	19.40%
Return on Equity (%)	67.43%	43.45%	45.94%	28.00%	16.90%

Data Source: Ace Equity

The revenue and profits have grown substantially, reporting a 4-year CAGR of 56% and 49.8%, respectively. The 5-year average RoCE and RoE stand at 41% and 40.7%, respectively.

Despite the pessimism, the company is confident of strong growth. Earlier this year, it reported that its business has been growing faster than the industry over the last three years.

It is filing more patents to legally secure its innovative programmes and securing investments from the government of Singapore.

The company is constantly investing in growing organically and inorganically, aiming to expand its business on a firm footing.

To know more about the company, check out its financial factsheet and latest quarterly results.

#4 KRBL

Fourth on our list is KRBL.

India accounts for over 70% of the world's basmati rice production, with KRBL leading the market.

The company's flagship brand, India Gate, is the undisputed leader in the Basmati rice genre in India and abroad.

While 65% of revenues come from the domestic market, the balance 35% stems from the international market.

The stock is available at a PE of 12.1x, close to its median PE of 11.7 times. This is a direct result of the correction in the stock price in the last few months led by poor performance in the quarter ending September 2023.

The company reported weak margins and a drop in realisations led by lower exports and high input costs.

While input costs are up from the year before, they have remained stable in the past few quarters.

KRBL Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	26.72%	9.33%	-11.21%	5.95%	28.28%
Operating Profit Margin (%)	20.99%	19.85%	20.62%	16.27%	18.48%
Net Profit Margin (%)	12.21%	12.41%	13.64%	10.61%	12.56%
Return on Capital Employed (%)	20.83%	21.08%	20.28%	15.45%	21.12%
Return on Equity (%)	20.06%	19.07%	16.39%	11.84%	16.00%

Data Source: Ace Equity

The business has been suffering, but it seems to be on the road to recovery since financial year 2023.

Between 2019-2023, the sales and net profit have grown at a 5-year CAGR of 7% and 8%, respectively.

The business has been generating cash, enabling the company to pare off its debt obligations. The total debt has come off, from Rs 14 bn and financial year 2019 to Rs 2 bn in financial year 2023.

Going forward, the company is expanding its distribution network, aiming to penetrate the market through improved availability.

KRBL's strong fundamentals, along with a recovery in the export market in the coming quarters, suggest that the business is well-poised for long-term growth.

To know more about the company, check out its financial factsheet and its latest financial results.

#5 Indian Energy Exchange (IEX)

Last on our list is the Indian Energy Exchange (IEX), India's first energy exchange company.

The company is a dominant player in the Indian power market, with a staggering 95% market share in the energy exchange sector.

It operates a trading platform, enabling participants to engage in electricity trading using various short-term contracts.

Apart from this, the company is also actively involved in promoting the transition towards renewable energy sources.

It plays a crucial role in issuing renewable energy certificates (REC) to renewable energy generators.

IEX enjoys a low-cost business model, with net profit margins ranging from 70-75%.

Despite leading the market and venturing into the much-anticipated renewable energy sector, the stock trades at a PE of 41x, a 12% discount to its 3-year median PE of 47x.

This is a direct result of the muted performance reported by the company in the past few quarters.

IEX Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	NA	1.10%	19.78%	35.98%	-2.13%
Operating Profit Margin (%)	95.60%	94.28%	90.93%	96.75%	102.19%
Net Profit Margin (%)	64.96%	68.34%	64.63%	71.60%	76.31%
Return on Capital Employed (%)	62.79%	59.93%	59.62%	66.24%	53.81%
Return on Equity (%)	45.40%	47.32%	45.97%	51.28%	41.56%

Data Source: Ace Equity

The business has done well between 2019-2023, with the revenue and net profit clocking a CAGR of 12.6% and 16.5%, respectively.

The returns have also been robust, with the 5-year average RoE and RoCE at 46% and 60%, respectively.

The company's growth has slowed in recent quarters due to supply chain disruptions affecting trading volumes.

However, IEX is optimistic about its prospects, as supply chain constraints are easing and demand is increasing.

The company's prospects look good, considering India's rising electricity demand, its focus on renewable energy, innovative products and services and strong financial health.

To know more about the company, check out its financial factsheet and latest financial results.

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...