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Demand for midcap stocks have surged as investors search for potential gains on hopes of an economic recovery post the elections that have seen a strong government at the Centre.
Also, as some of the large cap peers have already seen a huge run up in share prices, thereby making mid-caps more attractive. Because of the huge valuation gap, experts have started to find more value in the mid-cap companies which to a large extent did not participate in the rally because of the risk averseness of the investors.
For instance, the S&P BSE Sensex is trading at about 17 per cent higher levels compared to its 2008 peak, whereas the BSE Midcap Index is currently trading at 21 per cent discount to its all-time high in 2008. There is almost 40 per cent underperformance, which is also reflected in the valuations of these companies.
Based on historical valuation, at present, the BSE Midcap Index is trading at 10.75 times its earnings and 0.96 time its book value which is almost half the valuation of Sensex, which is currently quoting at 18 times its earnings and 2.87 times its book value. The differential seems to be now getting noticed as more and more investors are starting to find value particularly after the boost to sentiments because of the change in political environment in the country.
With the changing environment, it is not surprising that research houses have also turned positive on India and are recommending investors to look at the not-so-large companies or mid- and small-caps as they believe that these smaller companies will give better returns.
"We think mid-caps will out-perform big caps as (a) the economy recovers, the leverage of mid-caps is much higher (b) valuation differentials will narrow," noted Bank of America-Merrill Lynch in its recent report. The research house has upped its Sensex target to 27,000 from 25,000 earlier.
In the quest to identify quality mid cap names which have further upside potential and which are on the Street's radar, we spoke to research houses as well as looked at their recommendations. After going through the list we chose the companies which found the maximum number of mentions among the research houses. These include LIC Housing, HPCL, Crompton Greaves, Ashok Leyland, Oberoi Realty, Bata, Prestige Estates, Jain Irrigation, Persistent Systems and Finolex Industries. These companies span a range of sectors including housing, oil & gas, capital goods, real estate, agriculture, etc with some of them being dominant names in their businesses. A recovery in India's economic environment should prove positive for the fortunes of these companies.
And although many of them have risen from their troughs in the last few months led by improving sentiments, experts say that there is still good enough upside room in these counters.
| Company | Market cap (Rs cr) |
| LIC HF | 16,886 |
| HPCL | 14,708 |
| Crompton Greaves | 12,496 |
| Ashok Leyland | 7,743 |
| Oberoi Realty | 7,308 |
| Bata | 7,032 |
| Prestige Estates | 6,806 |
| Jain Irrigation | 4,418 |
| Persistent Systems | 3,632 |
| Finolex Industries | 2,924 |
| Note: in Rs crore. Source: Broking houses like, Edelweiss, Religare, Emkay, Axis Capital, Sharekhan, Deutsche, BoAML, BNP Paribas | |
