These are small and mid-cap stocks that Morgan Stanley’s Ridham Desai is betting on

• Between 2017-end and March 2020, the SMID indices were down more than 40% relative to the equity benchmark Sensex.
• Morgan Stanley now believes that SMID stocks are now all set to rally on the back of a growth recovery and attractive valuations.
• Aditya Birla Capital, CG Consumer, JustDial and Prestige Estates are some of the stocks that Morgan Stanley is overweight on.

Morgan Stanley’s Ridham Desai is bullish on small and mid-cap stocks. In a recent note, he said that after 30 months of struggle, Indian mid and small-cap stocks are poised for outperformance on the back of growth recovery and attractive valuations.

The Morgan Stanley report dated August 18 said the small and mid-cap (SMID) stocks went into a prolonged phase of underperformance after peaking in early January 2018. Between the end of 2017 and March 2020, the SMID indices were down more than 40% relative to the equity benchmark Sensex due to various reasons such as growth deceleration and relative valuations.

“The COVID-19 related lockdown did not help matters but has marked a floor on the cohort’s relative performance as a forward-looking stock market is possibly anticipating better growth. With monetary aggregates normalizing and significant policy action underway with a corporate tax cut last September, we think growth is set to turn,” the report said.

Here’s the list of stocks that Morgan Stanley is betting on:

Stocks	YTD Gain %
Aditya Birla Capital	-38%
Amara Raja Batteries	2%
Apollo Hospitals	17%
Bharat Electronics	11%
CG Consumer	9%
Exide Industries	9%
Gujarat Gas	32%
Gujarat State Petronet	-7%
Indraprastha Gas	-4%
Jindal Steel & Power	39.40%
Jubilant FoodWorks	18%
Just Dial	-31%
Mahindra & Mahindra Financial Services	-31%
MphasiS	30%
Multi Commodity Exchange of India	46%
Narayana Hrudayalaya	12%
PNB Housing Finance	35%
Prestige Estates Projects	25%
Shriram City Union Finance	30%
Shriram Transport Finance Co	40%
Sobha Developers	35%
Tata Power Co	9%

Source: Morgan Stanley report dated August 18

Morgan Stanley notes that smaller firms are likely to benefit more due to their operating and financial leverage. SMID valuations are looking attractive relative to GDP and money supply, setting the stage for outperformance versus large-cap stocks in the coming months.

They are overweight on 22 stocks in the small and mid-cap universe, with a market cap of around US$3.5 billion.

Morgan Stanley has also sounded a word of caution on three factors that pose major risks to the outperformance of broader markets — COVID-19 pandemic, lack of structural reforms, and the risk in the financial system.

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