Five mid-cap stars which refused to buckle during the coronavirus crisis

Global and Indian markets have witnessed a roller-coaster ride in 2020. For mid-cap indices, which were outperforming their larger peers during the early part of the calendar year, the ride has been bumpier. They were hit harder when equities tumbled during late-February and March on fears that economic contraction will hurt the medium-sized companies more. However, with markets recovering, midcaps have also rebounded and in fact, have outperformed benchmark indices by a good margin in the last two months. But, here's the catch.

While 136 of the 150 stocks (as defined as mid-caps as per Sebi rules) are in positive territory compared to March lows, the equation is far different if the performance is measured from the start of 2020. Of the 150 stocks, 83 are down by an average 22.9 per cent compared to their share price at the end of December 2019. Among the 66 in green, their average gain is at 31.3 per cent. This also indicates that many companies are yet to regain investor confidence to the level they enjoyed during the pre-Covid period. 

Amidst these unprecedented times, it will be interesting to see how some of the top gainers withstood the storm. Here are five such mid-cap toppers with stock returns ranging from 60–112 per cent, the drivers of these gains, and the road ahead.

Tata Communications

• The best performer in the mid-cap space has more than doubled in value on the back of multiple upgrades by brokerages
• This was due to the expansion of margins in traditional services led by cost optimisation and automation
• The Covid-19 pandemic and the restructuring of the enterprise communications requirements has led to demand for its products and solutions
• This should lead to a strong order book, robust operating profit growth and improving margins over the next couple of years 
• Analysts expect its net profits to double over the FY20-22 period, accompanied by falling debt levels and reduction in losses in its growth services segment 

Escorts 

• With tractors accounting for three fourths of its revenues, the company is the major beneficiary of strong volume growth in this segment
• A 24 per cent y-o-y growth in the September quarter was led by timely monsoons, record rabi production and early kharif sowing
• Various rural schemes of the government and higher crop prices also helped improve sentiment
• Higher availability of retail finance as compared to the situation six months ago is an enabler while the festival season should keep demand healthy
• Tie-up with Kubota of Japan will help it tap overseas markets and expand its global footprint. 

Mindtree

• Biggest beneficiary of shift to digital solutions and growth in the high technology space with over 40 per cent revenues coming from that segment. 
• Microsoft, its largest client which accounts for 30 per cent of revenues, has been growing at 35 per cent annually
• Its large deal pipeline is healthy and more ramp ups are expected going ahead leading to higher revenue visibility and client diversification
• New management, change in strategy and a strong parent in the form of L&T should reflect in improving growth metrics
• In addition to revenue growth, key triggers include margin gains which should help sustain valuations 

Ipca laboratories

• Growth momentum for the stock was led by prospects in India as well as international markets
• The domestic sales growth in the June quarter was better than peers and was helped by the company’s leadership in pain management as well as Covid-19 sales 
• Analysts expect momentum to continue and estimate a 12 per cent annual growth in domestic business during FY20-23.
• Export sales too have been robust, helped by drug supplies for Covid-19 treatment to the US and other geographies.
• Investment in raising active pharma ingredients capacity by 20 per cent will lead to higher backward integration and likely to boost earnings by 26.5 per cent over FY20-23, say analysts

Bayer CropScience

• After a good rabi season, a normal monsoon has helped sowing and farm activities during the kharif season 
• The clearance of farm bills by the government is likely to boost farmer incomes and is expected to be a long term positive for Bayer.
• The company’s integration with Monsanto has made it a dominant agrochemical and seeds player while synergies will drive margin profile and product mix.
• Soft raw material prices will aid margins while expansions, innovative product launches and ramp up of speciality portfolio will drive earnings 
• These triggers should help Bayer post earnings growth of 24 per cent annually over FY20-22