Midcap Sectors Present Complementary Earnings Growth Opportunities of 20-25%

Mid-Cap Opportunities Emerge as Earnings Growth Visibility Improves

After nearly 18 months of correction and consolidation in equities, Pankaj Tibrewal, a prominent market expert, is beginning to see opportunities emerge in various sectors, particularly in the mid-cap space. Tibrewal, who is bullish on the mid-cap space, highlights that earnings growth visibility is improving again in sectors such as chemicals, precision engineering, power ancillaries, and commodity-linked businesses.

The chemical sector, in particular, is showing promise as B2B businesses are experiencing structural pressures from China easing at the margin. This shift is attributed to the yuan's appreciation against the rupee, rising logistics costs, and changes in Chinese export incentives. According to Tibrewal, the yuan has appreciated more than 20% against the rupee, logistics costs have doubled, and Chinese government has withdrawn export rebates from 1st April for 300 items, mainly in the chemical sector.

As a result, the incremental rate of change is positive, and this improving outlook can be linked to a broader recovery in topline growth across corporate India. Tibrewal notes that after 12 quarters in a row, this is the first time where top-line growth of corporate India will be in double digits, likely around 12-13%.

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Beyond chemicals, Tibrewal highlights precision engineering as another area with strong long-term growth visibility, despite valuations not appearing inexpensive on the surface. He also points to auto-component companies expanding beyond traditional automotive manufacturing into aerospace and industrial applications, which have a huge long-term growth runway.

Other opportunities include power ancillaries and commodity-linked derivative businesses. Tibrewal believes that people have undervalued the potential of the thermal power sector, and as the world realizes the importance of coal, the entire ancillary to thermal power and the entire power play will do well.

On commodities, opportunities may increasingly lie one layer deeper within the ecosystem, specifically in derivatives such as grinding media, explosives, and so on. When the output of metals and mining starts to increase, these derivatives will gain out of it.

In the broader market setup, Tibrewal notes that the correction over the last year-and-a-half has moderated some of the excesses seen after the post-pandemic rally. While the market environment has changed significantly since February, with domestic inflows remaining strong, Tibrewal believes that this could shift market leadership toward bottom-up stock pickers and select midcap companies with stronger earnings visibility.

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Market Environment

The market environment has changed significantly since February, with inflation expected to remain a challenge in the foreseeable future. Tibrewal notes that the set of companies that perform well in the first leg of inflation is generally different from those in the last four to five years. This could lead to a shift in market leadership toward bottom-up stock pickers and select midcap companies with stronger earnings visibility.

Tibrewal also highlights that dispersion within the market has widened significantly, creating more differentiation within indices themselves. This is evident in the last two to three months, or calendar year to date, where the kind of dispersion seen in the index stock itself, even in large-cap indices like Nifty, is significant.