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Stocks to buy: 3 key concerns for smallcap, midcap shares; 20 top picks 

Stocks to buy: 3 key concerns for smallcap, midcap shares; 20 top picks 

Top stock picks: Nykaa, Emami, United Breweries, APL Apollo, Sun TV, Just Dial and UPL are among op Nuvama's top picks. It also likes stocks such as JK Cement, Petronet LNG, MGL and Jubilant FoodWorks.

Amit Mudgill
Amit Mudgill
  • Updated Apr 29, 2025 8:25 AM IST
Stocks to buy: 3 key concerns for smallcap, midcap shares; 20 top picks SMID stocks: Giving examples of 2018-2019 and 2008, Nuvama said the liquidity easing is a necessary, but not a sufficient criterion for market bottoms.

Among the three concerns plaguing smallcap and midcap (SMID) stocks namely tight liquidity, weak domestic growth and high valuations, only liquidity concerns have been addressed so far. Growth concerns have in fact accentuated and valuations remain lofty, Nuvama Institutional Equities said in its latest note, raising question whether the ongoing SMID rally can sustain given the backdrop.

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Giving examples of 2018-2019 and 2008, Nuvama said the liquidity easing is a necessary, but not a sufficient criterion for market bottoms. In both the instances, Nuvama said markets had a liquidity scare first, followed by a growth scare.

The brokerage prefers stocks such as Nykaa, Emami, United Breweries, APL Apollo, Sun TV, Just Dial and UPL. It also likes stocks such as JK Cement, Petronet LNG, MGL, Jubilant FoodWorks and Motherson Sumi Wiring, among others.   

"In our view, a sustainable bottom is formed only when either a policy response is mature to form a growth bottom or valuations are dirt-cheap. In both the 2008 and 2018 episodes, it took the Fed’s QE and at least 100 bps fall in 10Y bond yields to calm the markets. In this aspect, we think earnings yield minus bond yields (US and India 10Y) is a useful metric to capture the inflection points. This suggests that bottom may still be distant," it said.

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History suggests that while liquidity scare has largely played out, growth scare has not. Going ahead, without dogged policy support for growth revival is likely to be very challenging, and in that backdrop the current elevated valuations seem quite expensive, Nuvama said. 

With regards to correction in SMIDs by sector since September 2024, cyclicals have largely seen a larger correction and, as per Nuvama, rightly so. Some of the growth sectors such as EMS or consumer services have managed to hold up well.

"We thus continue to maintain a cautious stance on SMIDs. We will evaluate our stance depending on the evolving growth, liquidity and valuation framework," Nuvama said.

Strategy, stocks to buy 
The domestic brokerage said peak margins and peak valuations inevitably result in low returns for years, while low margins and low valuations are where the margin of safety is highest.  "Today though, there are very few sectors wherein margins and valuations are both on the lower end of historical ranges. In such a scenario, the next best outcome is to look for sectors where margins are currently low but shall likely improve," Nuvama said.

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Nuvama dividend SMIDs into three categories. The first is restructurers (cyclicals), where companies are recording depressed earning and low margins, but undergoing either consolidation or bottoming out of margins. Currently stocks in cement, agrochemicals and NBFCs fall into this bucket, Nuvama said.

The second category is rewarders (cash cows). The list pertains to high-dividend paying companies/utilities with stable cash flows. The third category is re-investors (compounders) where companies have demonstrated a consistent track record of compounding earnings by reinvesting in right areas. 

These typically have a very stable margin profile. Valuations are on the higher side, but the high quality of these companies lends confidence. "It must be noted that in recent times, compounders have been facing increased competition and have consequently also suffered a meaningful de-rating," Nuvama said. 

Here are 20 top SMID stocks from the brokerage firm:

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
Published on: Apr 29, 2025 8:24 AM IST
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