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On a high! Check out the midcaps that beat their bigger peers

A very focused and conservative strategy is paying out for this south-based bank.

, ET Bureau|
Oct 15, 2019, 07.36 AM IST
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The Mahindra group-owned real-estate company should benefit from the recent corporate tax cuts and the government’s push for the manufacturing sector.
ET Intelligence Group: At first glance, mid- and small-cap investments appear to have shrivelled since January 2018, with cautious investors moving to large-caps in a seemingly desperate bid to protect their committed capital. But such a narrative does a bit of disservice to the more competitive names in the broader market.

City Union Bank, VST Industries, Mahindra Lifespace and Can Fin Homes are among those midcaps that have outperformed their bigger peers. Even as the midcap index trails the large-cap gauges by 15 per cent, these four stocks continue to scale new highs and promise investors even bigger rewards for their patience.

VST Industries

The Hyderabad-based cigarette company and owner of the wellknown brand Charminar is seeing an average of 20 per cent growth for the past four quarters, almost twice that of its competitor ITC. Analysts assign this partially to the lower base at VST. Also, its cash-flows, return ratios and dividend payouts are better than those at ITC, which uses a lot of the cash generated from its cigarette business to help expand other revenue streams, such as food, hotels and consumer goods. For instance, VST’s return on capital for the previous fiscal was 55 per cent and dividend payout was 53 per cent, compared with 34 per cent and 50 per cent, respectively, for ITC. Despite strong performance, VST’s stock is trading at 24 times its trailing earnings — much lower than the multiples for other FMCG companies. ITC, too, trades at 24 times.

Can Fin Homes

Can Fin Homes reported a 17 per cent growth in its loan book in the first quarter of FY20, betraying little signs of the stress in the broader industry. HDFC showed growth of 15 per cent, while other names including Indiabulls Housing Finance and DHFL reported pronounced declines. Its gross non-performing loans at 0.7 per cent is half that of HDFC. Industry experts say the company’s strong regional and retail presence is helping sustain growth. At the same time, its strong track record has allowed it to slowly switch to bank loans at a very reasonable rate. Most home financiers are struggling to manage their liabilities and borrow at cheap rates. And Can Fin’s valuation, at 2.8 times the book, appears rather reasonable.

City Union Bank

A very focused and conservative strategy is paying out for this south-based bank, while its peer Lakshmi Vilas Bank has been struggling. While its rivals chased growth through corporate lending, CUB remained focused on the area it understands — the SME space. According to industry experts, the bank has a strong customer base and high customer loyalty. It has seen a 15 per cent growth in loans with strong NIMs, and has NPA of 3.4 per cent — a level considered under control by industry standards. In the first quarter, the bank’s loan book expanded 14 per cent, and it expects 18-20 per cent for the entire fiscal. Its stock has given 31 per cent returns, compared with 11 per cent for the Bank Nifty.

Mahindra Lifespace Developers

The Mahindra group-owned real-estate company should benefit from the recent corporate tax cuts and the government’s push for the manufacturing sector. It is developing industrial clusters in Chennai and Jaipur, and intends to lease and sell space that, until now, has not seen a major pickup. The company has an inventory of Rs 1000 crore, and is planning to launch projects worth Rs 1500 crore in the affordable and mid premium segments, in and around Mumbai. Its market capitalization is Rs 2200 crore, and the company has a debt to equity ratio of 0.1. Its stock has given 10 per cent returns in the past one year, outperforming its larger peer DLF that is down 1 per cent.
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