Domestic broking houses have turned bullish on battered mid-cap stocks, saying the recent sharp correction in some of them is overdone.
Motilal Oswal believes that the broad underperformance of the mid-caps is overdone and interesting bottom-up opportunities are now available in this space across sectors.
Over the last 12 years, according to a study by Motilal Oswal, the correction in mid-caps from the peak to the bottom has been much higher relative to large-caps in almost every episode of correction, barring one. The average difference in peak-to-bottom correction between the Midcap 100 and the Nifty in the past has been around 10-15 per cent. In the current episode, this difference stands at 23 per cent, almost twice the average differential, it added.
An Elara Capital study finds the relative valuation of mid-caps with respect to large-caps are at a historical low, with 7-DMAs at 2014 levels. The valuations are compelling at these levels for a revival in the performance of mid-cap stocks, particularly the quality ones that have taken a substantial beating in the recent market correction, added Elara Capital.
While SIP (systematic investment plan) flows (₹8,000 crore in Jan-19) continue to remain strong, lump-sum (non-SIP) flows have reduced to levels not seen in the last one year.
“Given the increasing returns from fixed income avenues, there could be short-term pressure on incremental flows to equities,” the domestic broking firm said.
According to Motilal Oswal, analysis of fundamentals and valuations for mid-caps and comparison of mid-caps versus large-caps on several frontiers suggest that the relative attractiveness of mid-caps has gone up.
In the near-term, the market direction will be on the sidelines of the forthcoming general elections and the consequent political outcome. Until then, it will be an era of high volatility, added MOFSL.
According to Elara, benign input prices (crude and commodities) and robust consumption outlook will lead to earnings recovery in FY20. “The Nifty MidCap consensus EPS CAGR for FY19-21 is at 22.4 per cent, which provides a strong fundamental support, in our view,” it said.
The MOFSL’s mid- and small-cap universe had an extremely volatile ride over FY12-18, culminating with a 43 per cent y-o-y profit decline in FY18. Drag from the PSBs in the mid-cap index impacted the broader performance in 2018, said Motilal, and added: “However, given the rebound in asset quality metrics of PSBs and the consequent reduction in provisioning costs, the profits for this index are expected to recover significantly in FY19 with 91 per cent y-o-y growth.”