The quest for quality mid-cap stocks during the COVID-19 pandemic

With both the Sensex and Nifty down by over 20 per cent from their recent highs, it is now certain that the COVID-19 pandemic has already taken a heavy toll on the broader markets. Moreover, social distancing measures, being followed to contain the spread of the virus, have cast a dark shadow over the global economy, putting a number of industries in a serious financial crisis. No doubt, this pandemic has been terrible but it paved the way for investors to make their investments work in the long run.

Although the market slump in the past few months has resulted in major sell-offs, it has led to many stocks, including some quality ones, being available at throwaway valuations. This story focuses on quality mid-cap companies that could easily tide over this pandemic and survive. We have used our primary quality stock filtering criteria, including Altman Z-score, Piotroski F-score, Modified C-score and an earnings yield of more than five per cent. Besides, we have focused on debt-free companies, as companies with significant debt may find it difficult to survive in times like these. We ended up with only one company.

Sun TV Network
With the growing spread of the virus and the extension of this pandemic-led lockdown in the country, millions of people are now compelled to stay home. One way to spend time at home is by watching TV. Broadcasting channels in several regional languages, including Tamil, Telugu, Kannada, Malayalam, Bengali and Marathi, SUN TV is in a good position to benefit from the situation. Further, its FM radio broadcasting through a subsidiary "Kal Radio Ltd," its joint venture with Red FM for a total of 59 radio stations and its OTT platform "SUN NXT" enabled the company to cater to the growing television and digital demand during the lockdown.

However, the growing opportunities bring the threat of competition from a large number of OTT service providers. Also, there is a serious impact on the company's advertisement revenues due to the ongoing slowdown across industries and the pandemic. Besides, since it owns an IPL franchise "Sun Risers Hyderabad," the cancellation of 2020 IPL because of the pandemic is likely to impact its revenue growth.

The company's stock has recovered a lot from the slump in the equity markets but is still down by more than 27 per cent over the last one year. As on December 2019 operating margin stood at over 71 per cent, its net profit margin came in at close to 36 per cent. The stock is available at a cheap valuation of 11 times earnings compared to its five-year median PE of 20x.

Disclosure: The intent of the article is not to recommend any specific stocks. If you wish to invest in any of the above-mentioned securities, please do thorough research.