NEW DELHI: Domestic benchmark indices might have come under a bit of pressure in recent time, but the strong liquidity this year have made the midcap index enjoy a rich premium of 62 per cent over largecaps on the valuations front.

Some of these smallcaps are trading much ahead of their long-term averages, leaving investors longing for a sharp jump in earnings to justify the prevailing valuations.

Foreign brokerage Bofa-ML noted that MSCI Midcap index has jumped 38 per cent in 2017. "Trailing or forward EPS growth has accounted for a small portion of the total market cap increase," it said on the broader market.

Data showed that Team Lease Services, which surged 37 per cent in November, now trades at 37.7 times its FY17 earnings. On a relative basis, this is at a premium of 99 per cent over Sensex PE multiple, Motilal Oswal Securities noted in its latest strategy report. The stock has risen 144 per cent year-to-date.



Ashoka Buildcon at 47.2 multiple now trades at 150 per cent premium to Sensex's price multiple on a relative basis. The stock in the past traded at around 14 per cent premium to Sensex multiple.

Blue Star now trades at 79 per cent premium over Sensex. This is against a 42 per cent premium it enjoyed over Sensex historically. Birla Corporation trades at 22 per cent premium relative to Sensex's historic premium.

Tata Elxsi whose PE multiple on an average traded in tandem with Sensex's long term average multiple, now trades 31 per cent premium to the index valuations.

Drugmaker, Alembic Pharma, at present trades at 15 per cent premium against 5 per cent discount to historic Sensex PE multiples.

On midcap stocks, Bhavin Shah of Sameeksha Portfolio Advisors told ET Now, "We look at companies bottom-up using our proprietary framework. That task has actually been difficult for almost a year now. But at the same time, if we keep looking across the spectrum, we keep finding opportunities. It is really a market for a stock-picker's market."

Meanwhile, there also remain stocks that have cut or wiped off their historical discount to Sensex.

Rain Industries historically traded at 82 per cent discount to Sensex PE multiple. The stock has narrowed this discount after a 31 per cent rally in November. This stock has rallied 547 per cent alone this calendar. It now trades at 46 per cent to Sensex PE multiple. CEAT and SRF remained some stocks that have seen a rise in their PE multiples.

Except for a couple of sectors, such heavily beaten utilities, metals and healthcare, most sectors are their above their 10-year averages. Domestic stocks are now trading at 22.2 times FY18E earnings. But analysts see earnings to rebound going ahead.

"We are positive on Indian equities for 2018 and forecast a 17 per cent Nifty return for the year. We foresee a strong multi-year corporate earnings recovery ahead. We also expect the policy initiatives to bear fruit, supporting the valuation multiples," Nomura India said in a note.
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