Federal Bank, Cummins India, Jyothy Labs and more: HDFC Securities lists 8 mid and small-cap picks

Indian stock market benchmarks, the Sensex and the Nifty 50, fell nearly 3 percent each on Monday, August 5, following a global downturn driven by mounting US recession fears and rising tensions in the Middle East that kept investors anxious.

The Sensex closed down by 2,223 points, or 2.74 percent, at 78,759.40, while the Nifty 50 ended 662 points, or 2.68 percent lower, at 24,055.60. This marked the second consecutive session of losses after reaching record highs since the election results at the end of June.

In this volatile environment, brokerage firm HDFC Securities has identified 2 mid-cap and 6 small-cap stocks with up to 55 percent upside potential. Let's take a closer look at these picks.

Mid-cap Picks

Federal Bank: The brokerage has a ‘buy’ call on the banking stock with a target price of ₹195, implying just 1 percent upside. Federal Bank, one of the largest old-generation private banks, had deposits and advances of Rs. 2.5 trillion and R. 2.1 lakh crore, respectively, at the end of FY24. HDFC noted that the bank reported mixed results for Q4FY24. While net interest income (NII) growth was in line with expectations, it was offset by lower other income and higher operating expenses, leading to a miss on operating profits. Net interest margins (NIMs) slightly expanded to 3.21%, and management expects margins to gradually improve as higher lending yields offset rising funding costs, added the brokerage. The bank's valuation at 1.2x FY26e adjusted book value is considered attractive, given the expected NII CAGR of 17% between FY24-26e and a projected return on assets (RoA) and return on equity (RoE) of 1.3% and 14%, respectively.

Cummins India: The brokerage has a ‘buy’ call on the capital goods stock with a target price of ₹4,328, implying a 24% upside. As per the brokerage, Cummins continue to post robust numbers given resilience in demand from data centers, residential and commercial real estate, infrastructure, and manufacturing. The company has multiple tailwinds, namely, stringent emission norms, capex cycle recovery, and revival in industrials which will help drive a 12-16% revenue CAGR for the next few years with likely higher growth in the near term, it added.

Small-cap Picks

Jyothy Labs: The brokerage has a ‘buy’ call on the pharma stock with a target price of ₹575, implying an over 12% upside. HDFC Securities observed that Jyothy Labs' fabric-care segment experienced a 14 percent revenue compound annual growth rate (CAGR) from FY20 to FY24, and similar growth momentum is expected to persist in the medium term. The brokerage anticipates mid-single-digit revenue growth (6 percent year-on-year) for its consumer coverage, primarily fueled by volume increases. Overall, they project revenue, EBITDA, and net income growth of 5.6 percent, 6.3 percent, and 6.7 percent, respectively, for 1QFY25.

JK Lakshmi Cement: The brokerage has a ‘buy’ call on the cement stock with a target price of ₹1,015, implying an over 25% upside. The ramp-up of its north expansion and upcoming east capacities should support 10% volume CAGR during FY24-27E. The company’s tight focus on geo-mix optimisation, increasing consumption of green energy (power and fuel), focus on lead distance reduction and digital adoption are further supporting its healthy margin outlook, it stated. Cool-off in the fuel prices should also drive margin expansion, added HDFC.

Kalpataru Projects: The brokerage has a ‘buy’ call on the construction stock with a target price of ₹1,702, implying over 36% upside. KPIL anticipates strong order bookings driven by the transmission and distribution (T&D) and civil sectors, along with market share gains in both domestic and international markets, according to the brokerage. With a solid order book and improving growth prospects, management has guided for 20% revenue growth in FY25, with an expected EBITDA margin of 8-8.5% and a PBT margin of 5%, as predicted by HDFC. Regarding the monetisation of its Build-Own-Operate-Transfer (BOOT) assets, KPIL is actively seeking prospective buyers and is in the advanced stages of a non-binding offer for VEPL by the end of Q1FY25.

Stylam Industries: The brokerage has a ‘buy’ call on the consumer disc stock with a target price of ₹2,750, implying an over 46% upside. Stylam is a leading manufacturer of decorative laminates and predominantly exports its products primarily to European and South East Asian countries. The brokerage appreciates Stylam for its industry-leading growth, strong EBITDA margin, healthy balance sheet, and impressive return ratio profile, with a return on equity (ROE) of approximately 25%. In Q4FY24, Stylam's revenue grew by 1% year-over-year and 12% quarter-over-quarter, driven by healthy volume, with exports increasing by 11% year-over-year while domestic sales declined by 16%. HDFC Securities expects Stylam to achieve industry-leading compound annual growth rates (CAGR) of 22% in revenue, 24% in EBITDA, and 23% in adjusted profit after tax (APAT) during FY24-26. These factors, combined with its healthy return ratios, are expected to lead to a rerating of the company.

Syrma SGS Technology: The brokerage has a ‘buy’ call on the industrials stock with a target price of ₹600, implying an over 28% upside. Syrma is one of the better play on the EMS space while is a big beneficiary of the government's thrust on Make in India & PLI scheme. The company posted a very strong set of numbers for Q4FY24 as topline grew by 67% YoY. the company also ended the year with a strong order book of ₹4,500 crore which provides strong revenue visibility for FY25e, noted HDFC. On back of the strong order book and expansion plans, Syrma is targeting to grow revenue by 45% with a 7% operating margin and positive OCF (reduction in NWC days), it added.

Sobha: The brokerage has a ‘buy’ call on the realty stock with a target price of ₹2,639, implying an over 55% upside. Sobha is renowned for its strong client loyalty and premium offerings, characterised by differentiated design and architecture, in-house construction, and a novelty factor, all of which support a 15-25% brand premium. The brokerage highlighted valuation comfort, robust free cash flow (FCF) generation, and potential deleveraging as key short-term factors that could lead to a rerating. It anticipates that a significant portion of the internal annual FCF of ₹1,000 crore, along with ₹2,000 crore from rights proceeds, will be used to expand into new growth markets like MMR and Pune, which will help drive future growth.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.