Sep 07, 2017 03:51 PM IST | Source:

Midcaps outperformed largecaps by 70% in last 5 years; these 40 stocks rose up to 1000%

“Over the last five years, midcaps have outperformed the Nifty by a whopping 70 percent. Midcaps now trade at a 22 percent premium to the Nifty on a P/E basis,” Motilal Oswal Securities said in a report.

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Kshitij Anand

Moneycontrol New

Midcaps stocks caught fancy of Indian retail investors, fund managers, as well as foreign investors soon after Narendra Modi, took charge at the centre as Indian Prime Minister back in 2014.

The outperformance has not stopped since then. The premium has now widened to 22 percent. Over the last 12 months, midcaps have delivered 19 percent return, as against 13 percent by the Nifty, and about 10 percent by the S&P BSE Sensex.

“Over the last five years, midcaps have outperformed the Nifty by a whopping 70 percent. Midcaps now trade at a 22 percent premium to the Nifty on a P/E basis,” Motilal Oswal Securities said in a report.

The S&P BSE Midcap index rose over 160 percent compared to 80 percent rise in the S&P BSE Sensex in the last 5 years. The rally in the index was led by gains in TVS Motor Company which rose 1500 percent, followed by Ajanta Pharma which gained 1004 percent, and HPCL which rose 613 percent in the same period.

As much as 41 stocks out of 79 stocks in the S&P BSE Midcap index rose between 100-1000 percent in the last five years which include names like Bajaj Finserv, UPL, MRF, Page Industries, Rajesh Exports, Piramal Enterprises, Kansai Nerolac, Ashok Leyland etc. among others.


Cheap valuations were one of the prime reason why investors flocked to midcaps and liquidity scenario which only strengthened in the last five years. Another strong reason was expectations of pro-growth policies by the Modi regime.

Domestic Mutual fund flows into Indian equities YTD has been USD 10.5 bn as compared to ~USD 7 bn of FII flows. Typically, a large portion of FII flows go into large caps whereas, in case of mutual funds, a larger portion of the retail money goes into mid cap funds, said a Kotak Securities report.



The government has been instrumental in introducing various reforming related to banking, real estate, infrastructure, housing, consolidation in the banking system, addressing problems of non-performing assets and most importantly the goods & services tax (GST).

“The outperformance of mid-cap stocks was mainly driven by the valuation gap existed between large and mid-cap stocks and surge in the liquidity conditions in markets,” Sumeet Bagadia, Associate Director, Choice Broking told Moneycontrol.

“Mid-cap stocks were available at very cheap valuation compared to sector leaders and thereby providing a margin of safety to investors. Going forward, mid cap stocks outperformance to large cap stocks will continue till the valuation gap between these two themes (after adjusting for size),” he said.

Valuations of Indian equities no doubt remain rich. The Nifty Midcap 100 trades at a 12-month forward P/E of 22.7x, at a 22 percent premium to the Nifty forward PE which trades at 18.6x, said Motilal Oswal report.

Will the outperformance continue?

In the month of August, the Nifty Midcap index slipped -1.3 percent trailed the Nifty, but valuation premium compared to large caps expanded to 22 percent from 14 percent witnessed in the month of July.

In the short-term, mid and smallcap stocks might come under pressure owing to geopolitical tensions as many of these stocks are already trading at steep valuations. Hence, putting fresh money will not make much sense.

“Midcaps have a tendency to outperform the large cap in the bullish market. Looking at the higher time frame chart, structure of Nifty Midcap 100, yearly trend is bullish. Intermediate correction is a part of the bull market as there is no sign of trend reversal in Midcap,” Dhaneshwar Padwal-AVP – Technical Analysis, KIFS Trade Capital told Moneycontrol.

Based on Bloomberg consensus estimates, the Forward PE of Mid Cap Index is at 207x Vs. 18.1x of the Nifty 50. This is not sustainable in the long run as mid cap Index should be trading at par or lower than Nifty 50 Index.

"We feel the outperformance of mid caps over large caps may not sustain in future. Two major reasons are: higher valuations and assumption of steep earnings assumption leave higher scope for disappointment," Rusmik Oza, Vice President - Kotak Securities told Moneycontrol.

"The premium valuations are also on the assumption of ~34% earnings CAGR of the mid cap Index as compared to ~20% earnings CAGR of Nifty 50 (for the period FY17-FY19E). The risk of earnings disappointment could be higher in case of Mid Cap Index as compared to Nifty 50," he said.
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