Mid-Caps: From Buds To Blooms

The Indian Mid-cap space is one which holds many attractive long-term investment options that have the potential of advancing greatly in terms of market capitalisation. Here, we take a look at some such companies that started out as mid-cap stocks and have now graduated to the large-cap space.

Mid-cap stocks are at an inflexion point of the investment universe. Mid-caps display the characteristics of both large-cap as well as small-cap companies. They are large enough to have experienced managements, proper business infrastructure and good market presence. At the same time, however, they do not enjoy economies of scale like the large-cap companies. This puts them in a sweet spot.

Therefore, for an investor looking for a multi-bagger idea to invest in, mid-cap stocks provide the right opportunity and companies. It has been observed that good mid-cap companies provide the best opportunity for capital appreciation. Research says that among BSE 500 companies, which have given returns of around five times in the last eleven years, almost 80 per cent are mid-cap stocks.

Such outperformance can be traced back to the improvement in the financials of the company following scaling up of the business and the benefit of economy of scale they start reaping. When we asked Dhiraj Sachdev, Senior Vice President & Fund Manager, HSBC Asset Management about this improvement, he said, “Midcap companies are often in the growth phase of the business lifecycle, experiencing higher earnings growth. Relative to their mature large-cap counterparts who have substantially penetrated the lion’s share of the market, mid-caps generally have ample opportunity for growth.”

What is important to note for the retail investors is that mid-caps give them the ideal opportunity to enter the stock. Many times smart money overlooks this space as it is considered more risky due to higher volatility as compared to large-caps. Sachdev further explains, “The fact that there is less overall research for mid-caps than large-caps suggests that there are greater opportunities to capitalise on inefficiencies in the mid-cap market”. Another way in which these companies benefit is that they are occasionally bought by larger companies, helping them to increase their value.

All these characteristics of mid-caps can be best exemplified by the performance of the some of the mid-cap companies that we had recommended in our ‘Mid-Cap 250’ compendium brought out in 2007. Spotting these companies is a very niche task. DSIJ has helped in identifying some of these very early on, helping investors benefi t. Out of the 250 companies that we listed, most of them have gained a lot in their market cap in the last fi ve years despite witnessing two tail risk events – the subprime crisis and the Euro-zone debt crisis. However, we have listed only the top fi ve companies (excluding some companies whose market cap has increased mainly due to increase in equity infusion) that have become large-cap companies. [PAGE BREAK]

Shriram City Union Finance

Shriram City Union Finance, which is a part of the Chennai-based Shriram Group, is a deposit accepting non-banking financial company (NBFC) specialising in retail finance. Since year FY07 till FY12, the company saw its asset under management growing by 40 per cent CAGR. At the time of our recommendation, the scrip (which was trading at Rs 160) is now at Rs 864, which means an annual return of 45 per cent per annum. This performance was perfectly backed by the financials of the company, where its topline and bottomline increased by 43 per cent and 47 per cent respectively for the five years ending FY12.

GRUH Finance

GRUH Finance, a subsidiary of HDFC, is one of the few companies that have not only made its investors rich by capital appreciation but also by consistent dividend payment. After adjusting for corporate action, the company’s scrip has appreciated by 57 per cent per annum, which marks an increase of 7.5x in a little over five years. This return was supported by improvement in its operating matrices. For the five years ending FY12, its loan assets and disbursement have seen a CAGR of 24 per cent. In addition to this, the company’s net profit also witnessed a CAGR of 32 per cent in the same period.

Whirlpool of India

The stock of this company, with a strong presence in the consumer durables space, looked attractive to us in the year 2007 and formed a part of our mid-cap space then. However, with better visibility and stronger performance, the scrip has graduated to the large-cap space now. Its market capitalisation has increased from Rs 370.46 crore as on February 2007 to Rs 3477 crore as of now, witnessing a stupendous CAGR of 64 per cent. The stock prices too followed the same path and saw a CAGR of 64 per cent in the same period. Coming to the financials, the topline for the five years ending FY12 saw a CAGR of 15 per cent. What is worth noting is that the bottomline has turned around, and from a loss of Rs 11.59 crore in FY07, it posted a profi t of Rs 127.19 crore in FY12. 

Vakrangee Softwares

Vakrangee Softwares has a presence in the e-governance domain. It also has one of the largest capacities in delivering large scale document and print management solutions. The expertise in its domain has helped the company to emerge as a large-cap player from the mid-cap space. The market capitalisation witnessed a CAGR of 57 per cent over a span of five years and the stock prices also appreciated at a CAGR of 27 per cent in the same period. Coming to the financials, the topline and the bottomline marked a five-year CAGR of 63 per cent and 24 per cent respectively.

CORE Projects & Technologies

CORE Education & Technologies (erstwhile Core Projects & Technologies) is the country’s largest global education company that has a presence across 18 states in India, 46 states in the US, eight African and three Caribbean countries. The stock has emerged strongly from the mid-cap to the large-cap space. The market capitalisation witnessed a CAGR of 38 per cent over a span of five years and the stock prices also appreciated at a CAGR of 24 per cent in the same period. As regards the topline and bottomline, these have witnessed a CAGR of 53 per cent and 59 per cent respectively in the period from FY07 till FY12.