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Midcaps are not that expensive anymore as valuations ease

The flight toward quality last year caused midcaps to significantly trail the largecaps.

, ET Bureau|
Updated: Mar 08, 2019, 08.58 AM IST
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Midcaps are not that expensive now. The valuation difference between the Nifty Midcap 100 and Nifty 50 has turned to a discount for the first time since May 2014.
In the past one year, only the most intrepid investor would have rustled up the courage to buy into midcaps. Buffeted by governance lapses, battered by earnings misses and bruised by relentless de-ratings, midcaps plunged from stratospheric heights they had reached last January.

A year later and in the run-up to the nationwide balloting, these stocks are very much back in favour – due to cheap relative valuations. The flight toward quality last year caused midcaps to significantly trail the largecaps – a 23 per cent underperformance relative to the Nifty since January 2018. The market capitalization of the Nifty Midcap 100 index even dropped below the December 2014 level.

So, midcaps are not that expensive now. The valuation difference between the Nifty Midcap 100 and Nifty 50 has turned to a discount for the first time since May 2014. Nifty Midcap 100 is trading at an 8 per cent discount to Nifty 50: At 15.85 times, the price-earnings ratio is lower than the 10-year average. The consensus earnings growth of Nifty Midcap 100 index is expected to be 23 per cent in 2020, compared with 16 per cent growth in the Nifty 50, according to Bloomberg’s data.

Midcap snip 2

Motilal Oswal research data showed that the spread between large-cap and mid-cap one-year trailing returns peaks out at 15-20 per cent. Currently, this spread stands at 18 per cent. Therefore, it is indicating a potential reversal of trade in favour of midcaps. Similarly, the peak-to-bottom correction of midcaps and the Nifty shows that the odds favour the former. The average difference in the peak-to-bottom correction between the Midcap 100 and the Nifty in the past 15 years has been around 12 per cent. In the current episode, this difference stands at 23 per cent.


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