Mapping Midcap Rush: These stocks saw returns outstrip earnings growth by the widest margin
Rally in midcaps has left the Street divided. One faction sees a “mad dash” happening in midcaps while the other believes the rally is far from over and the valuations are still catching up. No matter who is right, the fact is most stocks are getting re-rated on a daily basis, i.e., they are seeing their price multiples rising. This means stocks are delivering excess returns disproportionate to their earnings growth, leading to what some term as “froth”. Below are some names that have delivered maximum excess returns in the Nifty Midcap 100 index.
Despite a slowdown in demand in the chemical sector, Deepak Nitrite is sitting at hefty gains compared to its January 2020 level. It has seen among the maximum re-rating given earnings growth has failed to keep up with the price growth.
2/10
The second name is also from the chemical space, which highlights the slow growth in the sector. Navin Fluorine is a multibagger of yesteryears, and has seen some selling off late. However, the froth is still there especially as the stock trades at 75 times its earnings.
3/10
The power generation company trades at a whopping 123 times its earnings. However, that has not stopped investors from buying the stock as it is up 50 percent in the last six months. Meanwhile, its earnings growth has remained barely in double digits.
4/10
The textile sector, in the last 2-3 years, has seen its own good and bad phases. The sector is currently going through a rough patch, though looking at how Trident has racked up gains in recent months, it may look like anything but.
The Tata Group’s rising star is not a surprise on the list. The company has delivered revenue and profit growth at a breakneck pace in the last four years, and stock market returns at an even faster rate. This has led to the stock being expensive now, trading at 60 times its earnings.
6/10
Another name from the IT sector that gained a few fans in the last few years. Persistent Systems has stayed true to the hopes of investors and fund managers (growing profit at 35 percent CAGR), and has even managed to see re-rating.
7/10
The company is a supplier of cables and wires to a number of industries including defence, which has seen massive orders from the government, helping Polycab bulk up its earnings in the last few years. The company’s profit has grown at the rate of 20 percent in the last four years. However, exuberance has led to re-rating in the stock as well.
8/10
The contract manufacturer of electronic equipment has grown at a rapid pace amid the government’s support for local manufacturing. Its profit has grown at 34 percent a year, and its stock price has performed even better - rising at the rate of 69 percent.
The auto sector saw a resurgence in the last couple of years amid a rise in demand, EV-led disruption and new launches. Tube Investments, being a supplier of parts to auto companies, has been a big beneficiary of the trend, and the investors even more.
10/10
Midcap IT companies have been the talk of the town for a few years now. It is apparent as L&T Tech Services is the third IT services company on the list. Looking at the data, the company has lagged in terms of profit growth but not in terms of investor interest.
Shubham Raj has six years of experience covering capital markets. He primarily writes on stocks with special focus on F&O and PMS-AIF industry.
