Five midcap stocks that could turn into largecaps in 2024

ended calendar year 2023 on a strong note, notching around 20% gains, most of it coming in the latter half of the year. While Nifty 50 and Sensex gained about 15% in the last two months of the year, midcap stocks stole the show, with the BSE Midcap index shooting up by 20.4%. Several factors contributed to the rise, including healthy domestic macro numbers, cooling inflation in the US, and higher inflows from foreign portfolio investors (FIIs).

In calendar year 2023, the BSE Midcap index grew by 44%. Midcap companies have the agility to adapt to changing market scenarios and new technologies, despite having less established businesses than large caps. This is what makes them growth champions. Keeping that in mind, we have shortlisted five midcap stocks that could possibly turn into largecaps in 2024.

#1 BHEL First on the list is BHEL. The company is a leading integrated power plant equipment manufacturer in India. It performs design, engineering, manufacturing, erection, testing, commissioning, and servicing of a wide range of products across various sectors, including power, transmission, transportation, renewable energy, oil and gas, and defence sectors.

Why is BHEL considered a large cap worthy company? BHEL has the capability to manufacture the entire range of power plant equipment for thermal, gas, hydro, and nuclear power projects, which makes it stand out from the crowd. It has a global footprint in 88 countries across six continents, which contributes close to 10% of its revenue.

BHEL was also a part of major projects, including the Chandrayaan 3, for which it supplied friction welded bimetallic adaptors, batteries for lander and propulsion modules and a titanium propellant tank. As of September 2023, the company's order book stood at 33,400 crore, indicating a healthy revenue in the medium term.

Coming to its financials, the revenue has grown at a compound annual growth rate (CAGR) of 9.2%, driven by a healthy order book in the last three years. It reported a net profit of 470 crore in financial year 2023, as against a net loss of 2,600 crore three years ago. #2 Second on the list is Max Healthcare Institute.

The company is one of India's largest healthcare firms, with 17 healthcare facilities and 3,550 beds. It operates a chain of multispecialty, tertiary, and primary healthcare facilities predominantly in the Delhi and Mumbai regions, with 85% of its beds located in metro and Tier 1 cities. Max Healthcare Institute also recently increased its focus on the pathology business, where it owns 18 hospital based labs and offers over 2,000 tests through a network of 430 partner run collection centres and 22 company owned centres.

The company derives its revenue from multiple specialities, cardiology, oncology, neurology, and orthopaedic, which ensures diversified revenue streams. This has helped the company grow its revenue at a CAGR of 21.8% in the last five years. It also reported the highest ever profit after tax of 1,100 crore in the financial year 2023, driven by high average revenue per occupied bed and high average occupancy.

The net margin also improved to 24.2% as against 1.2% four years ago. As a result, the RoE and RoCE improved to 15% and 14.6%, respectively, the highest ever for the company. In the last five years, the company managed to reduce its debt by half, with the debt to equity ratio falling to 0.1x from 0.9x..

#3 Aurobindo Pharma Next on the list is Aurobindo Pharma. The company is the second largest Indian pharmaceutical company, the largest generic company in the USA, and among the top ten generic companies in seven out of eleven European countries. It manufactures and markets active pharmaceutical ingredients (API) and generic pharmaceuticals for several therapeutic areas, including neurosciences, cardiovascular, anti retroviral, anti diabetics, gastroenterology and cephalosporins.

It has nine state of the art research and development facilities and a team of over 1,500 scientists across multiple disciplines. This helps the company innovate and launch new products continuously. In the September 2023 quarter, the company filed 10 ANDAs (abbreviated new drug application), received approval for 15 and launched 19 new products.

To strengthen its API portfolio, the company has undertaken capacity expansion at several plants, which are in different stages. It also acquired Veritaz Healthcare to expand its domestic operations and enter cardio, diabetic, orthopaedic, and gynaecology segments in the domestic market. Coming to its financials, the revenue has grown at a CAGR of 5%, driven by higher sales across geographies.

However, the net profit has slightly declined due to higher input costs. Despite investing heavily in capex, the company’s net debt to equity remained zero. The company also pays consistent dividends to its shareholders and has a five year average dividend payout and dividend yield of 9.1% and 0.6%, respectively.

The company's focus on expanding its business in India and launching new products will drive its growth in the medium term. #4 Fourth on the list is IDFC First Bank. IDFC First Bank is a result of the merger of IDFC Bank and Capital First Bank in 2018. The bank is primarily a corporate focused bank, lending primarily to companies.

However, it is shifting its focus towards the high margin retail sector, which has helped improving its financials in recent years. The bank's advances and deposits grew at a CAGR of 12% and 15.5%, respectively, in the last five years. Its net interest income also grew at a CAGR of 29.6% during the same period.

IDFC First Bank's asset quality also improved, with the gross non performing assets (NPA) ratio at 2.1% in H1 FY24, as against 3.7% in FY22. It is witnessing high growth across several new retail product categories, including prime home loans, new vehicle loans, credit cards, gold loans, education loans, and tractor loans.

The company is scaling up its business operations across digital cash management solutions, trade forex, wealth management, FASTag, toll acquiring business, and credit cards. It is also introducing new variants of current, savings, and fixed deposit accounts to attract new customers. In the last one year, the company’s share price has gone up by 45%.

Going forward, its continued focus on scaling up its retail business will drive the growth in the medium term. #5 Solar Industries Last on the list is Solar Industries. The company is a leading manufacturer of bulk explosives, packaged explosives and initiating systems in the world, with a global market share of 24%.

It was also the first private player to manufacture RDX, HMX, and TNT, which are used by the defence industry to produce propellants, warheads, and rockets. Its products find use in mining, construction, defence, and infrastructure industries. The company has 40 manufacturing plants in India and abroad, with the Nagpur facility being the largest packaging explosives manufacturing facility in the world.

It also set up manufacturing facilities in Australia, Thailand, and Indonesia. Solar Industries is completely backwards integrated as it produces the majority of its raw materials in house, which also helps save on input costs. It has entered into a partnership with ISRO and Skyroot to offer propulsion systems and space launch vehicles.

Coming to its financial performance, the company's revenue has grown at a CAGR of 22.9%, driven by a high inflow of orders. The net profit has also grown at a CAGR of 24%. Healthy financial performance has led to an increase in its share price. As of September 2023, the order book stood at 3,910 crore.

The company is planning to invest 750 crore in capex in the financial year 2024 to increase its defence portfolio and expand its international presence. Going forward, its expansion plans and high order book will drive the company’s revenue in the medium term. Investment Takeaway The above mentioned and businesses with bright growth prospects.

However, you cannot ignore the fact that these companies have had their fair share of volatile periods. Therefore, if you plan to invest in a company, assess the fundamentals and prospects of the business. Sustained research must not be compromised despite the positive odds..