 "Bet on mid-caps, but cautiously")
Even as all isn’t well with the stock markets, 2015 continues to favour mid-cap scrips. Though Rs 730,977 crore has been wiped off the equity markets since January, the S&P BSE Mid-Cap index registered a gain of nearly three per cent, year-to-date. The mid-cap wave is visible even as the broader indices, such as the S&P BSE Sensex and CNX Nifty, hit their 13-week lows last Friday.
Therefore, seen against the heavy bearish cloud over blue-chips, experts believe mid-caps as a segment will continue to outperform the large-caps, given that domestic institutional investors remain buyers of smaller companies, in search of alpha (higher returns). The question is how much more is left for investors in this mid-cap party, given the strong gains this segment has shown.
While a majority of experts remain bullish on these stocks, they recommend investors be selective, as the valuations are no longer cheap. An analysis of 145 such stocks within the BSE 500 index (market capitalisation of Rs 5,000 crore to Rs 50,000 crore each) suggests the recent rally here could be a bit ahead of their financial performance getting stronger. Thus, making these expensive in terms of valuations (12-month trailing price to earnings or PE ratio).
Take Strides Arcolab, where the PE has jumped from five to 53 since January, while its earnings in the recently concluded September quarter grew only 23 per cent. If one goes through the list, many more show a similar trend. Aurobindo Pharma, Marico and Shree Cements have gained by 15-40 per cent year-to-date, while their valuations have shot up by 30 per cent or more (Shree’s is more than double).
“While now is still a good point to enter mid-caps, a carte blanche entry should be avoided,” says Nilesh Shah, managing director, Kotak Mahindra Asset Management. “As mid-caps are trading at a premium to large-caps, investors have to adopt a portfolio approach while picking these stocks and prefer companies with a track record of good corporate governance and generating free cash flow.”
Vinod Nair, head, fundamental research, Geojit BNP Paribas Financial Services, has similar advice. He feels consumer-oriented mid-cap businesses offer potential.
A Credit Suisse report says it expects the home construction and home improvement sectors to be benefit from the recent Pay Commission recommendations. “Eighty per cent of government employees are from smaller cities and most home improvement categories (tiles, pipes, plywood, etc) derive over 60 per cent of their revenue from such locations,” it says.
