Lupin, Federal Bank, CIE Auto and more: Axis Securities lists 7 mid and small-cap stock picks for August

In the last one month, the benchmark index Nifty 50 went up by 4% while the broader indices midcaps, smallcaps went up by 6% and 5%, respectively. This outperformance was led by improved sentiment and positive flows.

However, brokerage house Axis Securities believes that with the recent run-up in the market, most of the narrative is already priced in. Moving forward, the market is likely to adjust to the fundamentals. Moreover, with a strong catch-up by midcaps and smallcaps in the last couple of months, it noted, that the margin of safety (in terms of valuations) for these segments at current levels has reduced as compared to largecaps. Keeping this in view, the broader market may see some time correction in certain pockets in the near term and flows will likely shift to largecaps, predicted the brokerage.

Axis has come out with 7 mid and small-cap stock picks for the month of August. Let's take a look:

Mid-cap Stock Picks

Aurobindo Pharma: The brokerage has a target price of ₹1,580 for this pharma stock, implying a 10% potential upside. According to Axis, Aurobindo Pharma's injectables segment contributes $500 million to its revenue, accounting for 30% of its US sales, and offers the highest gross margins. However, it warned that the recent issuance of an Official Action Indicated (OAI) status for the injectables segment may hinder new product launches. Additionally, price erosion within this portfolio could negatively impact gross margins in the upcoming quarters.

Over the last two years, Aurobindo has invested ₹7,000 crore in capital expenditures, mainly in segments like biosimilars and Pen-G (API). As per the brokerage, the company's future valuations will be influenced by the return on invested capital (ROIC) generated from these investments. Despite these challenges, Axis highlighted that favorable industry trends and investments in new growth sectors provide a positive outlook for Aurobindo Pharma.

Lupin: The brokerage has set a target price of ₹2,150 for the stock, indicting a potential upside of 10%. Axis Securities noted that it has a strong pipeline of products, including Cynocobalamin, Diazepam Gel, Varenicline, Bromfenac, Glucagen, and Risperidone, among others. The company is expected to see double-digit growth in its India business, having already increased its number of Medical Representatives (MR) to 1,000. There is also an anticipated uptick in the Active Pharmaceutical Ingredient (API) business due to a revival in demand within the API industry.

Currently, Lupin’s margins stand at 18%, which is below the industry average of 22%, indicating significant potential for margin improvement in the upcoming quarters. This improvement will also be supported by favorable macroeconomic factors such as falling raw material prices, low logistics costs, and fuel costs, added the brokerage.

Dalmia Bharat: The brokerage has a target price of ₹2,120 for this cement stock, which implies a 15% potential upside. According to Axis Securities, cement demand is expected to remain strong, fueled by infrastructure development. The industry is anticipated to grow at 1.2 times the GDP growth, which is projected to be 6.5%-7% over the next several years. Given the company's strong position in key markets in the East and South, its exposure to the West region, the government's focus on infrastructure and affordable housing, increasing real estate demand, new capacity ramp-up, and ongoing cost optimisation measures, Axis expects DBL to deliver stable performance. Axis Securities predicts that the company will grow its Volume/Revenue/EBITDA/APAT at a CAGR of 9%/8%/11%/21% over FY24-FY26E.

Federal Bank: The brokerage has set a target price of ₹230 for this banking stock, indicating a 14% potential upside. According to Axis Securities, Federal Bank (FB) is well-positioned to achieve a sustainable Return on Assets (RoA) of 1.3%. Improving Net Interest Margins (NIMs), driven by a shift in the portfolio mix towards higher-yielding products, will be crucial for the bank to achieve a RoA of 1.4% and will drive the next phase of stock re-rating. Axis expects FB to deliver RoA/Return on Equity (RoE) of 1.3-1.4%/14-16% over FY25-27E, supported by steady NIMs, a gradually improving operating expense ratio, and stable credit costs of approximately 30-35 basis points.

Small-cap Stock Picks

CIE Automotive India: The brokerage has set a target price of ₹650 for this auto ancillary stock, indicating a 10% potential upside. Axis Securities is bullish on the stock based on its long-term growth prospects in Indian and Mexican operations, driven by increased capacities, potential for operational efficiencies, and a strong balance sheet. However, due to short-term challenges in the European and US markets and a slower-than-expected ramp-up in electric vehicle operations, the brokerage remains conservative in its earnings estimates for CY25/26E. Axis appreciates CIE Automotive's strong execution capabilities and taking these factors into account, the brokerage forecasts the company to achieve consolidated Revenue/EBITDA/PAT CAGRs of 8.2%/10.4%/13.8% over CY24-26E.

Westlife Foodworld: The brokerage has set a target price of ₹915 for this QSR stock, which implies a potential upside of 10%. Axis Securities maintains its positive outlook on Westlife Foodworld Limited (WFL) despite facing near-term challenges. The brokerage's confidence in WFL's future prospects is bolstered by the company's strong execution track record, with revenue and EBITDA growth of 17% and 51%, respectively, over FY16-20, driven by new product launches and cost rationalisation programs that achieved a 100-200 basis points cost reduction annually. Axis expects WFL to achieve healthy Revenue and EBITDA growth of 12% and 13% CAGR over FY23-26E (Post Ind. AS).

J Kumar Infraprojects: The brokerage has set a target price of ₹950 for the stock, which implies a potential upside of 10%. Axis Securities noted that the Indian government has pledged ₹11 lakh crore in the Interim Union Budget 2024-25 for the infrastructure sector, acknowledging its crucial role in driving economic growth. The company delivered a strong operating performance in Q4FY24, with revenue, EBITDA, and PAT growth of 26%, 27%, and 35%, respectively, surpassing estimates. With a robust and diversified order book, a healthy bidding pipeline, new order inflows, and emerging opportunities in the construction sector, coupled with efficient and timely execution and strong financial standing, Axis expects JKIL to achieve a revenue, EBITDA, and PAT CAGR of 17%, 19%, and 22%, respectively, over FY24-FY26E.

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.