Moneycontrol
Apr 11, 2017 10:59 PM IST | Source: Moneycontrol.com

Caution! Kotak says some midcap stocks in ‘bubble’ phase; time to cash out?

The valuation of India markets look reasonable on a top-down basis but the valuations of individual stocks are super-expensive or fairly valued in most cases, Kotak Institutional Equities said in a report.

Caution! Kotak says some midcap stocks in ‘bubble’ phase; time to cash out?

Kshitij Anand

Moneycontrol News

To invest or not to invest in midcap space? If you are a new to markets chances are you might be battling with this very question. Even if you are a seasoned investor, the gain this category recorded in the last 12 months will attract you to put it more money.

The S&P BSE Midcap index, which recorded yet another record high of 14,433.30 gave 31 percent positive returns in the FY17, as against nearly 16 percent given by the S&P BSE Sensex and around 19 percent by Nifty.

Midcaps have been consistently been able to outperform benchmark indices not just in last 12 month, but in the last five years. They have been consistent in multiplying investors’ wealth over a period of time and are now trading in a bubble phase, says a report.

The valuation of India markets look reasonable on a top-down basis but the valuations of individual stocks are super-expensive or fairly valued in most cases, Kotak Institutional Equities said in a report.

"We find valuations of several midcap stocks in our coverage universe very high. In fact, it would not be wrong to say that some are in the ‘bubble’ phase with the market extrapolating strong growth and high returns in perpetuity," it said.

While some of the companies do have certain strengths, Kotak find valuations at over 5X book for several semi-branded (semi-commodity) businesses absurdly high (refer table below) in the context of their business models and limited competitive advantages.

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The market expects a high return on equity (ROE) for a long time for certain semi-commodity sectors given their high P/B which include names like Amara Raja Batteries, Apollo Tyres, Exide Industries, ACC, Ambuja Cements, Dalmia Bharat, Shree Cement, Asian Paints, Voltas etc. among others.

Midcaps have been consistently been able to outperform benchmark indices not just in last 12 month but in the last five years. They have been consistent in multiplying investors wealth over a period of time.

"Over last five years, midcaps have outperformed the Nifty by 50 percent. Midcaps now trade at a 19 percent premium to the Nifty on a P/E basis. Premium has expanded on a month-on-month (MoM) basis for the third consecutive month," Motilal Oswal said in a report.

"Valuations of Indian equities remain attractive. The Sensex trades at a P/E of 18.1x, above its long-period average of 17.2x. At 2.7x, the Sensex P/B is at its historical average. The return on equity (RoE) is at 15.2%, which is still below its long-term average," it said.

But, will the momentum continue?

Some experts are of the view that the momentum will continue in the midcap space but earnings have to play a catch up as a time of making easy money might be over. Investors should remain conservative in their approach while investing in midcaps at current levels.

"We have been advocating our customers that the easy money making part of the market is over - that was there in November and December 2016. Now the hard part of making money in the market has come. There could be volatility in the market going ahead," Nilesh Shah, Managing Director, Kotak Mahindra AMC said in an interview with CNBC-TV18.

"Invest on a systematic investment plan basis, invest for a longer term duration, maintain asset allocation, spread bets across largecap, multicap, smallcap, midcap but do not invest in lump sum. Come through systematic investment and if there is volatility in the market, do not get dithered by it. Try to take advantage of it," he said.
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