Mid-cap stocks most expensive since 2006

Shares of India's medium-sized companies are the most expensive in eight years relative to larger counterparts, a sign that the rally has gone too far, according to Equinomics Research & Advisory Pvt. The data show the S&P BSE Mid-Cap index is valued at 18.3 times estimated earnings, a 7.2 per cent premium versus the benchmark S&P BSE Sensex. The gap reached 9.1 per cent on September 15, the widest since March 2006. The mid-cap measure has climbed 45 per cent since the start of the year, versus a 26 per cent gain in the Sensex.

While Prime Minister Narendra Modi's election victory in May has fueled speculation that companies tied to the domestic economy will gain from his growth-boosting policies, valuations have reached levels that previously foreshadowed losses. The last time the mid-cap index's price-to-earnings ratio was this high, in January 2008, the gauge tumbled 66 per cent over the next 12 months.

"There is a bubble building up in many small- and mid-cap companies," Chokkalingam G, managing director at Equinomics Research, said in a phone interview last week. "Many stocks are trading at richer valuations than industry leaders. People should remember what happened to mid-cap stocks in 2008. History repeats itself." Companies in the mid-cap gauge have a median market value of $767 million, data compiled by Bloomberg show. National Buildings Construction Corp and JK Lakshmi Cement, were the best performers in the past six months, gaining 400 per cent and 250 per cent, respectively.

The Sensex comprises 30 companies with a median value of $23 billion.