Short Call | Midcap mirage: unpacking a rally fueled by liquidity and hype; Kaynes Tech, GMR Power in focus

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Kotak's Note

A recent Kotak Securities report uncovered a noteworthy trend. "The top-25 stocks in the Nifty Midcap 150 Index have contributed almost 50 percent of the returns in the past 12 months. As many as 36 stocks (many traditional favorites) have delivered less than 10 percent return over the same time," the report reveals.

Much of the mid-cap surge has been driven by stocks in investment-related sectors, such as capital goods, electricity, NBFCs, railways, and real estate, which are categorized as 'narrative' stocks by Kotak. Meanwhile, traditional market darlings like building materials, apparel, and specialty chemicals have struggled, delivering minimal or even negative returns. This scenario raises two key questions: a) What’s driving this odd dichotomy? b) How long will these 'narrative' stocks continue to lead before they fizzle out?

Nevertheless, significant capital from new investors has flowed into mid-cap and small-cap funds over the past two years, as noted by Kotak.

In a landscape where liquidity and hype drive valuations and traditional metrics falter, investors wonder whether this party can continue.  However, it's hard to tell when.

Garden Reach Shipbuilders and Engineers (Rs 1,917, +4.7%)

Stock surged on anticipation of an announcement of sizeable naval defence orders

Bull Case: Garden Reach Shipbuilders is well-positioned for future growth with a diverse order book of Rs 25,231 crore, driven by major projects like P17 Alpha and Anti-Submarine Shallow Watercraft. Its expansion into autonomous platforms, green energy, and co-production of marine engines, coupled with anticipated high-value RFPs from the Indian Navy and Coast Guard, is expected to drive revenue over the next few years.

Bear Case: The deferment of a significant order in the Next-Generation Corvette (NGC) to FY26 could delay revenue growth beyond FY26. Coupled with 105 percent stock outperformance versus the Nifty in the last six months, future returns may be constrained.

Also Read | DAC greenlights Rs 1.44 lakh crore procurements; HAL, Mazagon Dock, other defence stocks in focus

GMR Power & Urban Infra (Rs 141, +5%)

Authum Investment & Infra's 1.2% stake purchase

Bull case: As the EV market in India is growing rapidly, the company has significant potential for growth in this domain, especially by establishing these facilities at airports operated by its group companies. Expansion in green energy, tendering for upcoming smart metering project will also drive re-rating of the stock.

Bear case: Any mechanical or technical issue or issues related to coal availability that may lead to lower generation can be a key risk for the earnings. There remains some uncertainty regarding the gas-based power plants, specifically about restarting the facilities or monetising the assets.

Kaynes Technology India (Rs 4,848, +4%)

The Cabinet has approved a Rs 3,300 crore proposal by electronics maker Kaynes Tech to build a semiconductor packaging plant.

Bull Case: As a result, the firm's management said it expects revenue from the segment to begin from Q4FY26, and by FY28, the segment will contribute revenue of Rs 1,500 crore. By FY30, the revenue from the semiconductor unit can clock in at Rs 3,500 crore. The high-margin segment will boost the bottom line.

Bear Case: Any countries adding an import duty on semiconductor chips from India could affect the revenue. Additionally, any delays in government approval for the process in setting up the OSAT will impact timelines.

(With inputs from Harshita, Lovisha, and Zoya)