Nifty has hit a high, Bank Nifty has hit a high but the midcap and smallcap index are way away from the highs. What is the sense you get about midcap, small cap rerating and then micro stocks as well?
The broader markets have probably not been performing but there have been specific stocks and sectors which have been performing in the last two or three months. It also has to do with the fact that we have seen a larger impact on midcap earnings. Most of these mid and smallcap companies experienced a larger impact on the margins this quarter and that is why probably some of the stocks have corrected quite a bit.
In fact, the margin hit has been as high as up to 7-10% versus last year or the last couple of quarters and that is where there has been a slight underperformance. But if you look at the commentary, most of the companies are looking for a better H2 than the H1 and we have seen a lot of these commodity prices cooling off in the last couple of quarters. That will have a positive rub off on margins in the coming few quarters.
The only reason they will have a slower top line may be that some of these export driven companies are seeing some kind of a slowdown in the US and Europe and UK but as crude and gas prices cool off, those countries will start to do well. That is where we will see some kind of growth coming back for these companies along with margins in the last quarter of this fiscal or maybe early in the next fiscal.
We have always seen new sectors getting added to the midcap space and how things moved ahead. Which are the sectors in the midcap space that are looking interesting?
If you look at the textile sector, those companies do not form a part of the top 50 or top 100 segment but still, they are very promising. These companies have borne the brunt of higher cotton prices in the last one quarter and probably some bit of slowdown in their customers in the US and UK and Europe. As things move, this sector looks very promising because there is a lot of government push here in this sector.
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There are a lot of PLI schemes which are coming up in the sector. Probably the government wants this sector to flourish. There have been free trade agreements signed with various countries like Australia and the Middle East. We have a couple of free trade agreements with the UK and Europe in the pipeline which will probably get signed in December or January and that will give further emphasis to the sector.
I feel there are a lot of promising companies in these sectors and this is one of the sectors which probably can do well going ahead. Apart from that, gas related sectors are where probably one would see certain companies on the CNG side which are probably not doing well.
Those are the companies which can do well. Probably CNG, LPG is one sector which can be looked at as well. Then there is one sector which is doing really well after Covid and that is the paper sector and that is once again sector which is seeing good tailwinds in terms of the prices being there and the demand being quite intact.
These are some of the smaller sectors which are not part of the top 100 club but there are a lot of promising companies in these sectors.
You did allude to all the sectors that you are pretty upbeat on. What are your top picks in those sectors? Which are the stocks that one can look at in the paper segment and the other segments that you have mentioned?
One theme which is coming up is that domestic focussed companies are going to do slightly better in the shorter term versus companies for whom a larger part of the revenues are coming from exports.
When it comes to domestic focussed companies, one of the companies is in the LPG storage and container segment. It is Aegis Logistics. In the past, this company has been doing really well because it has been the pioneer and the leader in the LPG storage container and distribution kind of segment.
There is a lot of demand coming in for LPG in various industries. If you look closer to Morbi, where a larger part of the ceramics industry line has started using LPG as an input. There are various industries in the glass segment which started using LPG and there are various other packaging companies which have started using LPG as an input.
This company has a JV with one of the larger LPG global companies which is Royal Vopak and through that JV they want to spread their wings across various ports in India and they are also gone into distribution of LPG. Now the distribution business is slightly picking up and that is why we see the commentary of the company being very positive for the next couple of quarters, based on the way they are seeing the container as well as the distribution and in the storage as well as the distribution business going. This is one company which probably looks very promising in the shorter term with regard to the prospects of the business.
Coming on the paper side,
is another company which we like. It is a market leader in the paper segment. The positive rub off which is coming in for paper companies is that the pulp prices globally are going high and because the pulp prices are very high, the input price is passed on and that is why the paper prices are actually in India as well as across the globe are trading very high compared to whatever we have seen in the last quarter.
This company is the leader in the paper industry and their paper business has picked up as post Covid, schools and the offices have started opening up. They are seeing some kind of cool-off in the packaging business but that will probably pick up in the next couple of quarters or so.
Any disclosures that you want to make because you have mentioned some stocks?
Some of these companies we probably have recommended to our clients.