Three bargain stocks from India’s mid-cap market

India has been badly affected by Covid-19. But the virus cannot change the compelling long-term growth outlook. With manufacturers seeking to reduce their exposure to China, India is emerging as a viable alternative. Prime Minister Narendra Modi’s offer of “red carpet” treatment to multinationals looking to base their operations in India bodes well, as do the country’s favourable demographics: more than 50% of the population are under the age of 25.

However, it is in India’s small and mid-cap companies that we see some of the biggest opportunities, particularly as they are welcoming home young entrepreneurial talent with a strong knowledge of best practice gained from employment or education abroad.

India’s small and mid-cap market has exciting growth potential and as valuations have fallen to near-15-year lows, now is an opportune time for investors to buy. For UK-based investors, buying individual Indian stocks can be a complicated process, but investment trusts such as ours offer an easy way to tap into India’s long-term story, particularly when it comes to owning illiquid but high-growth small and mid-cap companies.

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Consumers’ caffeine hit

While masala chai remains the drink of choice, Indian consumers’ penchant for coffee has proved resilient in the face of Covid-19, with CCL Products’ (Mumbai: CCLP) share price up by 19% so far this year. This consumption play forms part of the private-label instant-coffee manufacturer’s new business model. It has launched its own brand, Continental Coffee, to take on the likes of current market leader Nestlé. This, along with its strong reputation globally – CCL Products has a growing customer base across 90 countries – has helped to maintain demand and we expect earnings to increase at a compound annual growth rate of 15% over the next three years. With low-cost manufacturing and high-quality products, CCL Products should continue to benefit from its reputable customer base and capture domestic consumption growth.

A switch to greener energy

As India considers its carbon footprint and shifts away from coal, Gujarat Gas (Mumbai: GUJGA), the country’s largest urban gas distribution company, is one to watch. With the National Green Tribunal mandating a switch to cleaner sources of energy, natural gas consumption is steadily increasing. Gujarat Gas has operations across 24 districts and is expanding its pipeline network (currently 23,000 kilometres long). The company expects to see earnings compound by an annual 14% over the next few years.

The world’s pharmacy

India’s pharmaceutical industry is a key beneficiary of the global drive to reduce reliance on Chinese imports. Divi’s Laboratories (Mumbai: DIVISLAB), a manufacturer of active pharmaceutical ingredients, already has a strong order book, but we expect this to grow as new opportunities arise. The company’s long-term relationships with top global healthcare innovators, strong research and development capabilities and near-complete programme to double its capacity make it a key contender. We expect Divi’s profits to compound at 16% over the next two years.