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Citi Says It’s Time To Look At Mid Caps, Rejigs Portfolio

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It’s time to consider selective beaten-down mid-cap stocks as they are trading at a discount to the large caps first time in three years, according to Citi India.

While valuations are unlikely to have bottomed yet, according to Citi, a year of decline in mid caps was every time followed by positive returns in the last decade and a half. “Besides, all the three election years during the period have been good for mid caps.”

Among its top picks are cement maker Dalmia Bharat Ltd., agri chemicals company UPL Ltd. and healthcare chain Apollo Hospitals Enterprise Ltd. To select the right stocks, Citi suggests to consider the ones with:

  • $1-4 billion in market capitalisation
  • Daily trading volume of over $1 million
  • More than 12 percent return on equity.
  • More than 18 percent compounded annual growth rate in earnings per share.

India’s equity benchmarks tumbled from their all-time high on rising fuel prices and a weaker rupee. Capital outflows driven by rising rates in the U.S. and a liquidity crisis stemming from IL&FS crisis added to the selloff. While Sensex is trading 1 percent lower year-to-date, S&B BSE Midcap Index plunged more than 22 percent.

Citi, however, said that mid-cap stocks outperformed larger peers in the medium to long-term. Mid caps returned annualised gains of 19 percent in the last five years and 15 percent in the past decade compared with 10 percent and 13 percent, respectively, returns by large-cap stocks.

The research firm said fund inflows into mid-caps stocks was decent. “The assets under management rose 5 percent to Rs 6,000 crore in the first half of the current financial year for a set of 90 mid-cap focused funds even as the benchmark index fell 8 percent during the period,” it said.

Citi Rejigs Mid-Cap Picks

Citi India removed Mindtree Ltd., Petronet LNG Ltd., Gujarat State Petronet Ltd., L&T Finance Holdings Ltd. and Sun TV Network Ltd. to its top mid-cap picks. The research firm replaced these stocks with Indraprastha Gas Ltd., Larsen & Toubro Infotech Ltd., Oberoi Realty Ltd. and UPL Ltd.

It also sees National Aluminium Company Ltd. as “an interesting mid-cap stock” trading at four times its enterprise value-to-Ebitda ratio,

Citi is avoiding non-bank lenders due to the risks in the industry even as it sees a good high-risk opportunity in some NBFCs. Here’s a list of its top mid-cap picks:

. Read more on Markets by BloombergQuint.