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Mid caps outperform Sensex, but valuations still reasonable

Despite gains of more than 32% yesterday against Sensex?s 17%, BSE Mid-Cap continues to trade at lower valuations compared to the Sensex.

Despite gains of more than 32% ytd against Sensex?s 17%, the BSE Mid-Cap continues to trade at lower valuations compared to the Sensex. The BSE Mid-Cap is currently trading at a one-year forward price-to-earnings ratio of 12.34 compared to 13.54 one-year forward price-to-earnings ratio of Sensex.

In relation to their large-cap counterparts, mid-caps have been trading at a 15% discount. ?Mid-caps, as a pack, look quite reasonable despite recent outperformance. The BSE mid-cap index is trading at around a 15% discount currently to the broader market ? this has ranged between a 15% premium and a 40% discount over the past 10 years.

In some sectors, though, mid-caps trade at over 30% discount to their larger peers: consumer staples is one such sector,? Credit Suisse analyst said in a recent report. Experts feel on account of cheaper valuations, retail investors have become active in the mid-cap space.

?The Modi rally has given opportunities to retail investors to book profits. However, these investors are using the new money to re-enter the space,? said Rikesh Parikh, vice-president – market strategy, Motilal Oswal Financial Services.

Suzlon Energy is the top mid-cap gainer ytd, with returns of 175%. IRB Infrastructure (124.5%), Unitech (97.4%), Gujarat Pipavav Port (93%), Kajaria Ceramics (91%) and Edelweiss Financial Services (88.3%) have been the other top gainers ytd.

sensex

Nearly 4/5th of the BSE Mid-Cap stocks have touched 52-week-highs in CY14 while 1/3rd have touched all-time highs.

Certain brokerages attribute the current outperformance to elections. ?In the

last two elections, 12-month returns after the first day rise/fall, has been far better for midcaps vs large-caps or even other candidates such as levered stocks, high RoCE (adjusted for valuation), etc,? Axis Capital said in a report.

Even though mid-caps trade below large-caps, the BSE Mid-Cap has been trading above its long-term one-year forward P/E multiple average of 10.13.

Analysts feel mid-caps can see further re-rating. ?Currently, consensus expects BSE mid-cap earnings to grow by 26% CAGR over FY14-16 as against 15% for Nifty. In a potential economic upturn, this hypothesis should play out driving the outperformance of mid-caps,? CLSA said in a report. BSE Mid-Cap still trades 1247.12 points below its all-time high.

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First published on: 05-06-2014 at 21:42 IST
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