Midcap stocks typically represent companies with a market capitalisation between ₹10–15 bn, striking a balance between stability and growth prospects.

Now, when looking for investment opportunities in this segment, one crucial aspect to consider is a company’s Cash position.

Cash-rich midcap stocks are particularly attractive due to their strong financial position, which can serve as a catalyst for future expansion, acquisitions, and innovation.

In this article, we explore the top five cash-rich midcap stocks, each with significant cash reserves that have the potential to deliver favourable returns to investors.

Here are five companies that should be on your radar.

#1 Mazagon Dock Shipbuilders

The first stock on our list is Mazagaon Dock Shipbuilders.

The company’s cash in hand as a percentage of its market cap makes it the top contender on our list.

Mazagon Dock Shipbuilder’s cash and bank balance of ₹114.8 bn stands at 42.9% of its current market capitalization of ₹267 bn.

This is largely because the company holds fixed deposits (FDs) on its balance sheet and as a result receives interest of ₹5-6 bn each year from its deposits with banks.

The FDs are made primarily from the money received from customers in advance categorised as ‘Contract Liability’ until the money is paid/ advanced to the vendors for the shipbuilding parts.

Going forward, its liquidity position is expected to remain strong in the absence of any repayments. The company is almost debt-free except for import credit lines availed in the form of non-fund-based working capital limits.

So, what does the company do with the excess cash?

It pays dividends. The company has been a consistent dividend payer. It has paid an average dividend of ₹9.5 per share over the last five years. Its three-year dividend yield stands at 7.3%.

The company also has a robust order book which has been driving its share price.

The order book currently exceeds ₹40 bn, driven by three major contracts, namely Project-17A frigates, Project-15B destroyers, and Project-75 submarines.

In addition to these major contracts, it has signed a Memorandum of Understanding (MOU) with Germany’s Thyssenkrupp to participate in an Indian Navy submarine tender worth approximately US$ 5.2 bn.

Apart from this, Mazagon Dock has also entered into multiple agreements with private businesses. These agreements are aimed at boosting defence exports from US$ 1.5 bn to US$ 5 bn by the end of the financial year 2024-25.

 

#2 L&T Finance Holdings

The company’s cash in hand of ₹127.5 bn stands at 39.3% as a percentage of its market capitalization of ₹324.6 bn.

L&T Finance Holdings is a non-banking financial company that offers a diverse range of financial products and services such as farm equipment finance, two-wheeler finance, micro loans, etc.

The company is a subsidiary of Larsen & Toubro which holds a 63.5% stake in the company. L&T Finance has become an integral part of the L&T group and it derives constant technical and capital support from the parent company.

The company’s cash position is supported by the healthy growth in financials in the past year.

For the financial year 2023, L&T Finance Holdings reported a 52% YoY increase in revenue at ₹16.2 bn as its retail portfolio rose to 75% of the total loan book, up from 51% a year ago.

It also saw an increase in margins due to cheaper funds.

The company also witnessed the highest annual retail disbursements of ₹420.7 bn, driven by strong growth across all retail segments, which in turn reduced the wholesale book by 54%. The bottom line was also helped by better asset quality.

L&T Finance Holdings recently announced that it is looking to sell its wholesale loan book to interested banks, non-banking finance companies (NBFC) and funds.

It aims to become a 100% retail finance company.

 

#3 NMDC

The third stock on our list is NMDC.

NMDC’s cash on hand of ₹70.97 bn stands at 22.6% of its market cap of ₹313.6 bn. Its liquidity is supported by healthy cash accrual (despite significant dividend payout and capital expenditure [capex] incurred over the years), low bank limit utilisation and no major term debt.

NMDC is engaged in the business of exploration and production of iron ore, diamonds and sponge iron. It has also forayed into renewable energy and generates and sells wind power.

It also has the lowest cost of producing iron ore in the country and enjoys cost leadership over its peers.

The company has consistently paid dividends in the last 20 years, and its five-year average dividend yield is 5.94%.

 

In the last five years, the company’s revenue has grown at a CAGR of 17% on the back of growing volumes. The net profit also grew at a CAGR of 19.8%. As a result, the return ratios also improved significantly.

To meet the growing requirement for iron ore, the company plans to enhance the iron ore capacity to 67 MT by 2025 from the current capacity of 43 MT by 2025.

It has already invested ₹2.4 billion (bn) towards this, which it sourced from internal accruals.

Being a debt-free company, the company has no outside obligations. This, along with high free cash flows, help NMDC pay steady dividends.

In the financial year 2023, NMDC has already paid an interim dividend of ₹3.75.

Given the company’s growth plans and high free cashflows, shareholders can continue to expect steady dividends from NMDC.

 

 

#4 Muthoot Finance

The next stock on our list is Muthoot Finance.

The company’s cash and bank balance of ₹103 bn stands at 20.3% of its current market cap.

Muthoot Finance is an NBFC engaged in the business of providing gold loans. The company predominately operates in Southern India.

As the company is in the business of disbursing loans, the bank balance also includes repayment obligations.

A sizeable portion of the repayments comprises cash credit/short-term loans from banks, which are expected to be rolled over.

However, the short-term nature of gold loans provides support to the company’s liquidity profile.

The company’s debt-to-equity ratio stands at 2.36x which is comfortable for it to meet the medium-term capital requirements of its subsidiaries without affecting its own capital structure.

For the financial year 2023, the company had a 12% YoY decline in net profit at ₹34.7 bn. However, it recorded the highest-ever disbursements in the March 2023 quarter at ₹518.5 bn.

The company’s consolidated loan assets under management grew 11% YoY to ₹715 bn.

It has entered into new lending segments such as small business loans as well as micro-personal loans. It intends to achieve calibrated growth in these new products during FY24. It also expects a revival in disbursements from subsidiaries.

The company has consistently paid dividends over the last few years. It has paid an average dividend of ₹17.8 per share over the last few years.

Its five-year dividend yield stands at 1.5%.

 

#5 Rail Vikas Nigam

The last stock on our list is Rail Vikas Nigam (RVNL).

The company’s cash and bank balances of ₹18.5 bn stand at 7.2% of its market cap.

Rail Vikas Nigam was incorporated in 2003 by the Government of India. It is engaged in the business of implementing various types of Rail infrastructure projects assigned by the Ministry of Railways.

The liquidity position of RVNL is strongly supported by the strong cash generation from its own operations.

Besides, the cost-plus nature of orders with funding for execution met on a back-to-back basis between Indian Railway and the contractors provides readily available working capital support and stability to the margins of RVNL.

Though the company has a debt-to-equity ratio of 0.88x, it does not have any debt obligations to be serviced from its accruals.

The debt on the books is completely of pass-through nature wherein the servicing of the debt is done by the Ministry of Railways passing through the books of RVNL making the cash flow position of the company strong.

The company uses some of this cash to pay dividends. The company has paid an average dividend of ₹1.4 per share. Its four-year dividend yield stands at 5.3%.

RVNL was listed in 2019 and the company’s shares have seen a massive rally since then, rising over 500%. This was on the back of improved prospects.

For the financial year 2024, the railway minister has announced a capex programme of approximately US$ 29 bn in the Union budget.

RVNL stands to benefit massively from it. It is also eyeing the overseas market.

 

 

Why you should invest in cash-rich stocks

Investing in cash-rich stocks can offer several advantages.

They can provide a sense of security to investors as a high cash balance indicates that the company has sufficient liquidity to meet its short-term obligations and invest in growth opportunities.

Cash-rich companies also have more flexibility to adapt. They can weather economic downturns more effectively, as they have the resources to sustain their operations and even take advantage of distressed opportunities.

Besides this, they distribute a portion of their excess cash to shareholders through dividends or share buybacks.

However, it’s important to note that while cash-rich stocks offer potential advantages, they should be evaluated comprehensively, considering other fundamental factors like the company’s management, industry outlook, competitive landscape, and growth prospects.

Conducting thorough research and analysis is crucial before making any investment decisions.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

Updated: 10 Jul 2023, 08:10 AM IST