5 Undervalued Midcap Stocks to Watch Out for in 2023

Investing in midcap stocks can be one of the most rewarding ways to earn high returns while also taking on a little more risk.

To invest in midcaps, you need to look for companies with solid fundamentals and sustainable business models.

Another factor you need to consider is valuations. Undervalued stocks have time and again proven to be the safest options.

However, in a bullish market (like the present one), it often becomes very difficult to find undervalued stocks.

But if you dig deeper and have the patience, you'll find there are some pockets of undervalued stocks. These can be some great buys you can take advantage of.

If a leading daily is to be believed, then value investing has made a good comeback in 2022.

Mutual funds following the value style of investing, have done well in 2022, notching up returns in low-double digits. Value stocks like ITC, NTPC among others, have also delivered a market beating performance.

So 2022 turned out to be a good year for both value stocks as well as funds dedicated to this style of investing. We believe value investing will continue to outperform in 2023 as well.

With that in mind, let's take a look at five undervalued stocks from the midcap space.

We have selected the high-quality names which are trading at not so expensive valuations. These stocks have a price to earnings (PE) multiple between 20 and 50 and have low debt to equity.

This way, valuations are not very expensive and quality is also good as we are essentially considering zero debt companies.

#1 HDFC Asset Management Company (AMC)

First on the list is the HDFC group company - HDFC AMC.

HDFC AMC was started in 1999 and set up as a joint venture between Housing Development Finance Corporation (HDFC) and Standard Life Investments.

During financial year 2019, the company carried out an initial public offering (IPO) and became a publicly listed company in August 2018.

HDFC AMC offers a large suite of savings and investment products across asset classes. It also provides portfolio management and segregated account services to high net worth individuals (HNIs), family offices, domestic corporates, trusts, provident funds, and domestic and global institutions.

In the past five years, the company has grown its revenue at a modest rate of 4% on a compounded annual growth rate (CAGR) basis.

Profits have grown at a CAGR of 14% during the same period.

Return ratios for HDFC AMC are compelling with 5-year average return on equity (ROE) coming in at 33.4% while return on capital (ROCE) comes at 46.4%.

HDFC AMC has also declared hefty dividend for shareholders over the years.

Financial Snapshot of HDFC AMC

Rs m, standalone	FY18	FY19	FY20	FY21	FY22
Revenue	17,568	19,152	20,033	18,525	21,154
Growth (%)	19%	9%	5%	-8%	14%
Operating profit	10,676	13,876	17,124	18,133	19,178
OPM (%)	61%	72%	85%	98%	91%
Net Profit	7,113	9,306	12,624	13,258	13,931
NPM (%)	40%	49%	63%	72%	66%
Debt to equity (x)	0.0	0.0	0.0	0.0	0.0
ROE (%)	38.8	35.1	35.6	30.2	27.3
ROCE (%)	57.6	51.6	46.8	39.9	36.2
Dividend per share (Rs)	16	24	28	34	42

Data Source: Ace Equity

Coming to valuations, HDFC AMC is currently trading at a price to earnings (PE) multiple of 33.75 and a price to book value (P/BV) of 8.7.

The stock is trading at a discount when compared to its historical average.

Valuation Ratios for HDFC AMC

(x)	FY19	FY20	FY21	FY22	TTM
PE Ratio	35.1	35.6	46.9	32.9	33.8
P/BV Ratio	10.7	11.2	13.1	8.4	8.7
High PE	54.5	68.0	56.1	51.4	-
Low PE	33.8	33.6	35.2	31.6	-
Industry PE	27.9
Industry P/BV	6.1

Data Source: Ace Equity

On the stock performance, HDFC AMC has fallen around 26% in 2022 so far. Its performance since listing isn't very noteworthy and has fluctuated largely at times.

#2 Supreme Industries

Next on the list is Supreme Industries.

The company is one of the leading manufacturers of plastic products in India.

With a comprehensive product portfolio, it has a presence in several business segments. Some of its key business verticals are the plastic piping division, packaging products, and consumer and industrial products.

Supreme Industries has 25 manufacturing facilities across the country, handling over 350,000 tonnes of polymers annually.

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In the past five years, the company has grown its revenue at a rate of 9% on a compounded annual growth rate (CAGR) basis.

Profits have grown at a CAGR of 18% during the same period.

The company's 5-year average return on equity (ROE) stands at 23.2% while return on capital (ROCE) stands at 31%.

Supreme Industries has also declared dividends at a growing rate.

Financial Snapshot of Supreme Industries

Rs m, consolidated	FY18	FY19	FY20	FY21	FY22
Revenue	49,701	56,120	55,115	63,552	77,728
Growth (%)	11%	13%	-2%	15%	22%
Operating profit	7,969	7,999	8,455	13,011	12,621
OPM (%)	16%	14%	15%	20%	16%
Net Profit	4,318	4,486	4,674	9,781	9,685
NPM (%)	9%	8%	8%	15%	12%
Debt to equity (x)	0.13	0.08	0.18	0.00	0.00
ROE (%)	22.1	21.5	19.8	30.7	21.8
ROCE (%)	30.6	30.7	25.7	37.3	29.4
Dividend per share (Rs)	12	13	14	22	24

Data Source: Ace Equity

Coming to valuations, Supreme Industries is currently trading at a PE multiple of 44 and a price to book value of 9.2.

It has commanded such valuations in the past at peak levels. Its PE ratio at present is slightly above the industry average of 28.7x.

Valuation Ratios for Supreme Industries

(x)	FY19	FY20	FY21	FY22	TTM
PE Ratio	31.5	23.6	26.5	26.8	43.8
P/BV Ratio	6.6	4.9	8.2	6.8	9.2
High PE	41.7	38.5	48.4	29.5	-
Low PE	23.0	22.6	21.6	22.2	-

Data Source: Ace Equity

As far as stock performance is concerned, the share price has seen a run-up in recent weeks.

In 2021, the company announced a capex of Rs 8.5 billion (bn). It plans to establish three greenfield plants in India and expand existing plants' capacities.

Apart from capacity expansion, the company plans to increase the share of value-added products in its portfolio, which has a very high operating profit margin.

#3 CRISIL

Third on the list is rating agency CRISIL.

CRISIL is a leading innovative global analytics company driven by its mission of making markets function better. The company is India's foremost provider of ratings, data, research, analytics, and solutions.

A strong track record of growth, culture of innovation and global footprint sets the company apart from its competition. CRISIL is majority owned by S&P Global Inc, a leading provider of ratings worldwide.

In the past five years, the company has grown its revenue at a rate of 7% on a compounded annual growth rate (CAGR) basis.

Profits have grown at a CAGR of 9% during the same period.

The company's 5-year average return on equity (ROE) stands at 33% while return on capital (ROCE) stands at 42.5%.

CRISIL has been a consistent dividend payer for nearly two decades.

Financial Snapshot of CRISIL

Rs m, consolidated	CY17	CY18	CY19	CY20	CY21
Revenue	16,585	17,485	17,317	19,818	23,007
Growth (%)	7%	5%	-1%	14%	16%
Operating profit	4,807	5,446	5,287	5,938	6,875
OPM (%)	29%	31%	31%	30%	30%
Net Profit	3,044	3,631	3,440	3,547	4,658
NPM (%)	18%	21%	20%	18%	20%
Debt to equity (x)	0.0	0.0	0.0	0.0	0.0
ROE (%)	32.0	35.4	31.6	30.0	33.4
ROCE (%)	42.7	45.9	42.5	38.0	43.4
Dividend per share (Rs)	28	30	32	33	46

Data Source: Ace Equity

Coming to valuations, CRISIL is currently trading at a PE multiple of 55 and a price to book value of 21.2.

Historically, credit rating agencies have been known to trade at steep valuations on the back of oligopolistic market, asset-light nature of the business, limited capex requirement, and strong operating cash flows.

Their incremental profit growth and good deployment of cash leads to healthy return ratios. Dividend payout is also on the higher side for these firms.

Valuation Ratios for CRISIL

(x)	CY18	CY19	CY20	CY21	TTM
PE Ratio	32.2	40.2	39.4	45.2	55.0
P/BV Ratio	10.9	12.5	11.1	13.7	21.0
High PE	47.1	40.2	44.1	60.7	-
Low PE	28.4	23.8	24.0	36.4	-

Data Source: Ace Equity

On the stock performance, the company has gained 58% over the past five years.

#4 Bayer Cropscience

Next, we have an agrochemical company with a marketcap of Rs 213.4 bn, Bayer Cropscience.

Bayer Cropscience is an Indian subsidiary of Bayer AG, world's largest pharmaceutical and life sciences company based out of Germany.

The company's association with India dates back to the 19th century. Since then, it continues to make significant contributions to India's agriculture and public health.

It provides various products and services through its 3 business divisions: Crop science, pharmaceutical products, and consumer healthcare.

In the past five years, the company has grown its revenue at a rate of 12% on a CAGR basis.

Profits have grown at a CAGR of 17% during the same period.

The company's 5-year average ROE stands at 19% while ROCE stands at 27.2%.

Bayer has paid hefty dividends in the past two years and could continue this dividend payout in the coming years.

Financial Snapshot of Bayer

Rs m, standalone	FY18	FY19	FY20	FY21	FY22
Revenue	27,099	31,673	36,094	42,613	47,344
Growth (%)	-3%	17%	14%	18%	11%
Operating profit	4,482	5,342	7,924	8,755	8,657
OPM (%)	17%	17%	22%	21%	18%
Net Profit	3,001	3,371	4,745	4,931	6,453
NPM (%)	11%	11%	13%	12%	14%
Debt to equity (x)	0.0	0.0	0.0	0.0	0.0
ROE (%)	15.7	16.8	19.8	19.3	25.4
ROCE (%)	21.7	24.4	24.8	31.5	33.9
Dividend per share (Rs)	18	18	25	115	150

Data Source: Ace Equity

As far as valuations are concerned, Bayer Cropscience is currently trading at a PE multiple of 29.6 and a price to book multiple of 7 times.

In most of its previous years, the company has commanded a higher valuation than the current levels. The industry PE is 33.8x.

Valuation Ratios of Bayer

(x)	FY19	FY20	FY21	FY22	TTM
PE Ratio	44.6	32.7	48.3	34.7	29.6
P/BV Ratio	6.8	6.0	9.3	8.9	7.2
High PE	54.3	54.9	56.8	56.1	-
Low PE	39.5	32.8	30.3	34.7	-

Data Source: Ace Equity

On the stock performance, in 2022 so far, Bayer Cropscience has fallen 6% while it has gained 18% over the past five years.

#5 Bosch

Last on the list we have auto-ancillary company Bosch.

The company is a leading supplier of technology and services in the areas of mobility solutions, industrial technology, consumer goods, energy, and building technology in India.

Additionally, it has the largest development center outside Germany, for end to end engineering and technology solutions.

Financials of Bosch have fluctuated to a great deal in the pandemic years which has had an impact on the long-term averages. Revenues currently stand at same levels where they were five years ago while profit has declined marginally.

The company's 5-year average ROE stands at 11% while ROCE stands at 16%.

The company has a history of paying dividends since 1994 and a growing track record at that.

Financial Snapshot of Bayer

Rs m, consolidated	FY18	FY19	FY20	FY21	FY22
Revenue	116,901	122,578	98,416	97,162	117,816
Growth (%)	4%	5%	-20%	-1%	21%
Operating profit	26,050	27,565	20,299	16,646	18,531
OPM (%)	22%	22%	21%	17%	16%
Net Profit	13,711	15,983	6,495	4,820	12,183
NPM (%)	12%	13%	7%	5%	10%
Debt to equity (x)	0.0	0.0	0.0	0.0	0.0
ROE (%)	14.6	16.7	6.4	5.0	11.9
ROCE (%)	21.8	24.7	10.1	6.1	14.9
Dividend per share (Rs)	100	105	105	115	210

Data Source: Ace Equity

On the valuations front, Bosch currently trades at a PE multiple of 39 and a price to book multiple of 4.7.

Valuations for Bosch

(x)	FY19	FY20	FY21	FY22	TTM
PE Ratio	33.5	42.7	86.2	35.0	39.0
P/BV Ratio	5.9	3.0	4.2	4.0	4.7
High PE	49.0	46.3	618.1	97.4	-
Low PE	38.4	25.4	40.1	30.4	-

Data Source: Ace Equity

As far as stock performance is concerned, the company has underperformed big time in the past five years and in 2022.

It has fallen 14% in five-year period and 1% in 2022 so far.

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Here are some of the valuations screens that should help you get started in the world of value investing.

• Most Undervalued Stocks in India
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• Low PE Smallcap Stocks in India

Equitymaster's valuation guru and Co-head of Research, Rahul Shah, recorded a video some months ago explaining how to use the most important valuation metric - PE ratio, like a pro.

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...