10 Most Undervalued Midcap Stocks to Watch Out for as 2023 Begins

The Indian stock market hit a record high in November 2022 and the momentum continued in December as well. However, things have changed in the past few days.

Markets have fallen amid concerns over rising Covid cases globally. Moreover, apprehensions ahead of Reserve Bank of India's latest policy meet and key macroeconomic data from the US have also contributed to the fall.

While these short-term concerns may continue to affect the markets, it may be a good opportunity to enter the market to scout best midcap stocks for the long-term.

Here are ten undervalued midcap stocks to watch out for in 2023.

#1 DCM Shriram

First on our list is DCM Shriram.

DCM Shriram's share price has shot up in the past five years, rewarding its shareholders with a 50% return. However, since the beginning of the year, the share price is down 10%.

It is trading at a Price-to-Earnings ratio (P/E) of 12.1 times, a mere 17% premium to its 5-year median P/E of 10.2 times.

DCM Shriram is conglomerate. It runs a wide array of businesses, ranging from chemicals and agricultural products to sugar and cement. While chemicals and agricultural products contribute equally to the business with over 51% of the revenues, sugar contributes over 40%, with balance coming from other cement and other smaller businesses.

DCM Shriram Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	19.30%	13.00%	0.20%	6.60%	15.70%
Operating Profit Margin (%)	15.60%	18.20%	16.10%	14.50%	18.70%
Net Profit Margin (%)	9.50%	11.30%	8.90%	7.80%	10.60%
Return on Equity(%)	24.00%	27.50%	19.00%	15.50%	21.00%

Data Source: Ace Equity

The company has grown its business substantially in the past few years. While the sales have grown at a 5-year compound annual growth rate (CAGR) of 10.6%, the net profit has grown at 14.1%.

This outstanding performance has resulted in high return ratios, enabling the firm to retain a solid balance sheet. The 5-year average return on equity (RoE) stands at 21.4%, and the debt-to-equity ratio is low at 0.27 times.

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

#2 Gujarat Ambuja Exports

Next on our list is Gujarat Ambuja Export.

Gujarat Ambuja Export's stock price is up 1.6 times in 5 years and 46% since the beginning of the year. Despite this, the stock trades at a PE of 13.3 times, a 14% premium to its 5-Yr P/E.

The company is principally involved in the agro-processing business with dominance in maize products, edible oils, and cotton yarns.

It competes in the domestic and global markets and caters to the food, pharmaceutical, and feed industries. It has 12 manufacturing facilities spread across India and exports to over 75 countries.

The maize processing and edible oil segments are the key growth-driving factors contributing to its presence in the domestic market. While the maize processing unit contributes 56% to the total revenues, the edible oil unit contributes 38%.

Gujarat Ambuja Export Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	20.90%	20.00%	-5.10%	23.70%	-0.20%
Operating Profit Margin (%)	9.80%	9.80%	9.60%	10.20%	13.20%
Net Profit Margin (%)	4.30%	4.40%	4.30%	4.60%	8.10%
Return on Equity(%)	14.40%	14.60%	12.40%	12.00%	20.50%

Data Source: Ace Equity

The dominant position has allowed the business to perform well over the past few years. The sales has grown at a 5-year CAGR of 8.4% while net profit has grown at a CAGR of 33.7% respectively.

This has expanded the RoE to 25% in the financial year 2022 from 15% in 2018, and helped the company maintain a healthy balance sheet with negligible debt.

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

#3 Transport Corporation Of India

Third on our list is the Transport Corporation of India (TCI).

The stock price has doubled in the last five years. However, it has fallen by over 14% since the beginning of the year. It is now trading at a P/E ratio of 15.3 times, a 12% discount to its 5-year average of 17.4 times.

TCI is the country's premier organised freight services provider with a pan-India presence. The company offers Integrated logistics & supply chain solutions catering primarily to the healthcare, auto, chemicals, and retail industries.

It enjoys a wide presence across segments such as coastal shipping services, container & bulk cargo movements, and rail and road transportation services.

This integrated offering allows it to offer last-mile connectivity, setting it apart from other players. And the company's performance in the past few years is a true testament to that.

Transport Corporation of India Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	20.90%	17.30%	-1.30%	3.30%	15.90%
Operating Profit Margin (%)	9.80%	9.80%	9.60%	10.20%	13.20%
Net Profit Margin (%)	4.30%	4.40%	4.30%	4.60%	8.10%
Return on Equity(%)	14.40%	14.60%	12.40%	12.00%	20.50%

Data Source: Ace Equity

While the sales have registered a 5-year CAGR of 10.9%, the net profit has grown by 32.1%. This has led to strong returns with a 5-year average RoE of 14.8%. The company enjoys a pristine balance sheet with a 0.36 times debt to equity.

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

#4 Eris Lifesciences

Fourth on our list is Eris Lifesciences.

The company's stock price has been falling since the beginning of the year. It has tumbled over 13%. It is trading at a PE of 23 times, a 6.5% discount to its 5-year median PE of 24.6 times.

Eris is a pharmaceutical company. It derives its revenue from the domestic branded formulations market, with chronic and sub-chronic therapies accounting for a considerable portion (93%) of the business.

Eris Lifesciences Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	13.90%	14.90%	7.50%	12.00%	12.50%
Operating Profit Margin (%)	40.70%	38.40%	35.70%	35.30%	36.60%
Net Profit Margin (%)	34.50%	29.60%	27.60%	28.50%	29.10%
Return on Equity(%)	41.30%	29.00%	24.30%	24.80%	23.30%

Data Source: Ace Equity

Their strong and sustainable brands have enabled them to expand their business and operate at high margins. While the sales have grown at a 5-year CAGR of 13.2%, the net profit has grown at 10.5%.

The RoE has also advanced, reporting a 5-year average of 28.5%. This performance has allowed the company to maintain a solid balance sheet and keep the debt levels low.

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

#5 Firstsource Solutions

Fifth on our list is Firstsource Solutions.

The company's stock hasn't performed well since the beginning of the year, affected by the fears of a global recession. It is down 32%, trading at a PE of 15 times, just a 9% premium to its 5-year median PE of 13.7 times.

Firstsource is an information technology (IT) company catering primarily to the banking, financial services and insurance (BFSI) (43% of the total revenues), healthcare (34%), communication and media industries (20%).

The company boasts a well-diversified stream of revenues, with the top five clients accounting for 35% of the business.

Firstsource Solutions Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	-0.60%	8.20%	7.10%	23.70%	16.60%
Operating Profit Margin (%)	13.10%	14.10%	15.60%	15.90%	16.20%
Net Profit Margin (%)	9.20%	9.90%	8.30%	7.10%	9.10%
Return on Equity(%)	15.00%	15.00%	12.40%	13.10%	18.70%

Data Source: Ace Equity

In recent years, the business has risen significantly. On a 5-year CAGR basis, the sales and net profit have reported 10.7% and 14% growth. The returns have been robust, expanding the RoE from 15% in the financial year 2018 to 18.7% in 2022.

Much like its peers, the company has funded this growth with negligible debt on its book. The debt-to-equity ratio in the financial year 2022 stands at 0.35 times.

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

#6 Birlasoft

Next on our list of undervalued midcaps is Birlasoft.

The stock has not been immune to the fears of a global recession affecting the entire IT sector adversely. The stock price has fallen by over 35% since the beginning of the year. It is now trading at a PE of 17 times, a 21% premium to its historical median PE of 14 times.

Birlasoft is an information technology (IT) company catering primarily to manufacturing (46% of total revenues), pharmaceutical (22%), banking, financial services and insurance (BFSI) (17%), energy and utility (15%) sectors.

The company boasts a well-diversified stream of revenues, with the top five clients accounting for 30% of the business.

A large part of the business comes from the USA, which accounts for nearly 80% of the total revenues, followed by Europe (11%) and the rest of the world (9%).

Birlasoft Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	9.90%	7.40%	-16.20%	7.50%	17.10%
Operating Profit Margin (%)	11.60%	12.50%	13.20%	15.40%	17.10%
Net Profit Margin (%)	7.10%	7.70%	6.80%	9.00%	11.20%
Return on Equity(%)	15.60%	17.40%	12.60%	15.80%	19.50%

Data Source: Ace Equity

Birlasoft's revenues and net profit have reported a 5-year CAGR of 4.4% and 14.2%, respectively. The balance sheet is strong with no debt, and the 5-year average RoE stands at 16.2%.

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

#7 Computer Age Management Services

Seventh on our list is Computer Age Management Services (CAMS).

The company's stock price has fallen over 15% since the beginning of the year. It is now trading at a PE of 39 times, a 13% discount to its 5-year median PE of 45 times.

CAMS is the largest registrar and transfer agent of the Indian mutual fund industry.

The company enjoys an aggregate market share of 69.5% of the assets under management with mutual funds. Its mutual fund customer list boasts ten of the country's top fifteen largest mutual funds.

Their primary job is to deliver a seamless interface to asset management companies, investors, exchanges, depositories, and other stakeholders.

Computer Age Management Services Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	32.00%	7.20%	1.30%	4.90%	23.60%
Operating Profit Margin (%)	39.70%	34.00%	44.00%	46.20%	48.50%
Net Profit Margin (%)	23.30%	19.50%	24.60%	29.10%	31.50%
Return on Equity(%)	34.60%	30.00%	34.50%	39.10%	51.20%

Data Source: Ace Equity

CAMS's dominance in the business has contributed to the robust growth reported by the company in recent years. The sales and net profits have reported a 5-year CAGR of 13.7% and 17.7%, respectively.

The RoE has also expanded, up from 33% in the financial year 2018 to 46% in 2022. With a debt-free balance sheet in tow, the business is all set to benefit from the fintech megatrend.

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

#8 Craftsman Automation

Eighth on our list is Craftsman Automation.

The company's stock price is up 45% since the beginning of the year, mainly led by the demand uptick in the auto segment.

Despite this outperformance, it is trading at a PE of 35 times, a mere 10% premium to its 5-year median of 31.8 times.

Craftsman Automation operates in three main segments largely catering to the automobile sector. These include automotive powertrain (52% of the revenue mix), automotive aluminium (20%), and industrial & engineering (28%).

The company is a leading player in the machining of critical engine and transmission components, primarily for medium and heavy commercial vehicles (MHCVs), tractors and off-highway segments. However, its relatively new aluminium die-casting business has also taken off.

Craftsman Automation Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	34.20%	22.70%	-18.10%	4.80%	41.30%
Operating Profit Margin (%)	19.30%	25.10%	27.20%	29.00%	24.40%
Net Profit Margin (%)	2.20%	5.40%	2.70%	6.20%	7.30%
Return on Equity(%)	5.70%	15.20%	5.70%	11.50%	15.50%

Data Source: Ace Equity

This is evident from the growth reported by the company in recent years. The sales and net profits have grown at a 5-year CAGR of 12.9% and 30.9%. This comes on the back of margin expansion and growth in volume, leading to an improvement in returns.

While the RoE went up from 5.5% in the financial year 2018 to 14% in 2022, the debt-to-equity ratio went down from 0.7 times to 0.3 times over the same period.

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

#9 V-Guard Industries

Next up is V-Guard Industries.

The company's stock is up 20% since the beginning of the year. Despite the jump, it is trading at a PE of 48 times, a discount to its historical 5-yar PE of 52 times.

V-Guard Industries is an electronics manufacturer operating in the capital goods sector. The business comprises electronics (23.5% of total revenues), electricals (45.9%), and consumer durables (30.6%).

The company's innovative techniques in tandem with an extensive network of distributors have spurred business growth.

V-Guard Industries Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	11.30%	11.90%	-3.30%	8.50%	28.00%
Operating Profit Margin (%)	8.60%	8.80%	10.60%	11.50%	9.50%
Net Profit Margin (%)	5.80%	6.00%	7.00%	7.00%	6.20%
Return on Equity(%)	20.30%	21.40%	20.60%	18.80%	17.90%

Data Source: Ace Equity

While the sales have registered a 5-year CAGR of 11.7%, the net profit has grown by 9.6%. The company has no debt on its books and the 5-year average RoE stands at 19.8%.

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

#10 Clean Science And Technology

Last on our list is Clean Science And Technology.

The company's stock price has tumbled around 40% and is trading at a PE ratio of 60 times, which is a 40% discount from its 1.5 year median PE of 86.7 times.

Clean Science and Technology is a leading chemical manufacturer. It manufactures and supplies chemicals to customers across the world. This includes China (35% of total revenues), India (30%), Europe (15%), America (14%), and the rest of the world (6%).

The company is one of the few companies to successfully commercialise environment-friendly processes to manufacture certain speciality chemicals.

Clean Science And Technology Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)		164.70%	106.30%	125.10%	132.90%
Operating Profit Margin (%)	32.30%	37.60%	46.80%	55.60%	48.20%
Net Profit Margin (%)	20.10%	24.80%	33.30%	38.70%	33.40%
Return on Equity(%)	26.00%	35.90%	45.50%	45.00%	34.90%

Data Source: Ace Equity

In recent years, the business has expanded significantly. The revenues and net profit have multiplied by more than 3 times in the past 5 years. With no debt on its books, the healthy cashflows have led to 5-year average RoE stands at 37%.

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

In conclusion

As attractive as smaller undervalued companies may seem, you must understand that the prospect of outsized returns comes in tandem with high volatility.

However, investing for the long term can take care of that. Apart from helping you ride out any short-term market swings, it can also give undervalued businesses enough time to realise their full potential.

Small businesses are more agile and have more room to grow in comparison to their larger peers. Moreover, some midcaps trade at lower prices and valuations, offering the potential for higher returns. So once the company grabs a great opportunity, the business can quickly get on the fast track to growth.

But no matter how great the returns maybe, you must do your due diligence and in-depth research before parting with your hard-earned money.

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...