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Covid-proof mid-cap stocks

These two companies have the potential to maintain their pre-COVID growth level as and when the economy recovers

Covid-proof mid-cap stocks

The COVID-19-led pandemic has slowed down wheels of the economy considerably. Economists, rating agencies and others are forecasting a GDP contraction in FY21 followed by an uncertain recovery in FY22. However, amid this gloom and doom, the stock markets across the world have made a great comeback from their March lows buoyed by liquidity infusion by central banks. In India, the SENSEX is up by around 28 per cent from April 1, 2020. The street seems to have anticipated a swift economic recovery in the coming time.

Against this backdrop, we looked for mid-cap companies that were growing steadily before the pandemic hit. We assumed that these companies would benefit even more from the economic recovery, as and when it happens. While screening companies, we used the following criteria:

    Last quarter earnings growth> than 20 per cent

    Last one-year earning growth> than 20 per cent

    Last five-year earning growth> than 20 per cent YoY

    TTM P/E: less than 15

From an extensive list of mid caps, only two companies qualified our growth at reasonable price filters. While the first company is benefiting from a long-term trend in the sector that favoured the domestic chemical industry, the other one belongs to a defensive sector.

Deepak Nitrite
Chemical companies in India have been on a roll for the past couple of years. It mainly started in 2015-16 when China, representing 35 per cent of the global chemical industry, started imposing restrictions on its chemical companies, owing to environmental concerns. This event was followed by the US-China trade war, which further impacted Chinese exports to western markets. Adding to it, Covid-induced global pandemic is leading to a switch in the global chemical supply chain, thereby benefiting Indian companies.

Deepak Nitrite has benefited from the above-mentioned trends. In the last one year, its stock has more than doubled. At present, it is trading at a P/E of 13.8 as compared to its five-year median P/E of 16.

Buoyed by developments in the chemical sector, the company increased its sales by around 45 per cent YoY during the last three years till March 20, while its net profit grew by about 85 per cent during the same period. Its operating margin zoomed to about 25 per cent from around 12 per cent during the same period. The company is now on an extended capex cycle and completed a capex of about Rs 1600 crore in the past five years till March 2020. It is now expanding its phenol & acetone business. The company has also managed to bring down its debt to equity from 1.0 in March 2017 to 0.7 in March 2020.

Jubilant Life Sciences:
Indian pharma companies are getting a shot in the arm during the ongoing covid meltdown. Belonging to a defensive sector, pharma companies have become a safe haven for investors. The government's reform measures to decrease the imports of pharma raw materials from China and an anticipated switch in the global supply chain is further paving the growth path for the sector.

Jubilant Life Sciences has benefitted from these structural changes. Recently, it has signed a licensing agreement with the US-based pharma major, Gilead Sciences, to register, manufacture and sell Gilead's investigational drug, Remdesivir, a potential therapy for Covid-19, in 127 countries, including India. Further, the company is planning to launch its flagship product, Ruby-Fill, in Europe in FY21.

Over the last three months, its stock price has almost doubled. During the last three years until March 2020, it grew both its revenue and net profit by around 15 per cent YoY. The company has also managed to improve its balance sheet by reducing debt to equity to 0.8 in March 2020 from 1.1 in March 2017, while maintaining a healthy ROE of around 17 per cent. Also, about Rs. 1400-crore cash on the balance sheet as of March 2020 provides the company with the flexibility to tackle covid-led uncertainties. The company is also under the process of demerging its low-margin life sciences business as a separate entity. The stock currently trades at a P/E of 13.7 as compared to its five-year median of 16.3.

Disclosure: The intent of the article is not to recommend any specific stocks. If you wish to invest in any of the above-mentioned securities, please do thorough research.