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FIIs help bridge gap with Nifty but earnings fail to match up

The discount of P/BV of BSE Midcap to the Nifty fell to 26% in September 2014 against 40% at the start of 2013.

, ET Bureau|
Sep 25, 2014, 09.11 AM IST
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The BSE Midcap’s P/E is at a 9% premium compared with the Nifty, which is the widest premium since May 2006. 
The BSE Midcap’s P/E is at a 9% premium compared with the Nifty, which is the widest premium since May 2006. 
Early signs of euphoria have started to reflect on Indian equities, with the BSE Midcap index’s valuation gap with the benchmark index Nifty — both in P/E (price-earnings) and P/BV (price-book value) terms — narrowing down considerably in the last three months.

However, during the same time, earnings upgrades of midcaps have not been in step with the rise in stocks.

The BSE Midcap’s P/E is at a 9% premium compared with the Nifty, which is the widest premium since May 2006.

The BSE Midcap is currently valued at 17.9 times of one-year forward earnings compared with 16.5 times of the Nifty, according to Bloomberg data.

FIIs help bridge gap with Nifty but earnings fail to match up
At the same time, another valuation parameter, P/BV multiple too has bridged the gap quite considerably with the Nifty.

The discount of P/BV of BSE Midcap to the Nifty fell to 26% in September 2014 against 40% at the start of 2013. In the last 10 years, the P/BV of the BSE Midcap has traded at a 35-45% discount to the Nifty.

The main reason that helped midcaps outperform benchmark indices in the last three months is an increased allocation to midcaps by FIIs.
Foreign funds have deployed nearly $2.1 billion in midcap stocks alone in the June quarter, the highest absolute allocation since January 2009.

But outperformance of midcaps will entirely depend on whether an earnings upgrade in midcap stocks will also be able to beat the Nifty earnings upgrade.

Historically, relative re-rating of midcap stocks compared with the Nifty is matched with the relative higher earnings upgrades.

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