The minions, it seems, are having an edge over India’s corporate giants in earnings performance. A brokerage analysis shows that contrary to perception, the profit growth maintained by the lower-rung Nifty 500 companies over the last three years far exceeds the earnings growth of top-deck Nifty 50 companies.

The latest investment strategy report from Sanctum Wealth Management says “while the Nifty 50 has grown profits at a compound annual growth rate (CAGR) of 9.7 per cent over the past three years, the CNX 500, excluding the Nifty 50, has grown earnings at 18.8 per cent. That’s twice the PAT growth rate of the Nifty 50.”

Similarly, the expected profits growth for the Nifty 50 over the next three years is 19.6 per cent while that for the CNX 500, ex-Nifty 50, is an even more impressive 32.8 per cent. Though such forward estimates not entirely reliable, the report points out that are the relative spread is still meaningful and remains above 12 per cent points.

The report says that despite these meaningful differences in growth rates, the relative valuation for the Nifty 50 in FY19 is only 5.5 per cent points lower at 21.4 times versus the CNX 500 (ex-Nifty 50 ) at 26.9 times. The spread is low for FY18 as well, at 6.9 percentage points and valuations are essentially even at FY20.

The report says that for a slight premium in valuation, investors receive nearly twice the growth rate in the CNX 500 (ex-Nifty) universe. Another way of stating it is that the trailing price-earnings growth (PEG) on the Nifty 50 is an expensive 2.8 times versus a reasonable 1.8 times for ex-Nifty.

The Sanctum report also challenges the perception that the smaller cap Nifty 500 companies see massive sell-off during downturns. “We wanted to test the oft-stated refrain that the smaller cap ex-Nifty universe sells off aggressively during sell-offs. During the sell-off in 2015, the differential between Nifty 50 and CNX ex-Nifty was actually the opposite of what most would expect. The CNX 500 ex-Nifty delivered a positive return peak to trough in the 2015 sell-off. This was true in our portfolio as well, where quality mid-cap growth delivered a positive return. In 2011, the differential was 5 pr cent, hardly a concern given the significant outperformance the CNX ex-Nifty has delivered.

The analysis, Sanctum says, “reinforces our view that CNX 500-ex Nifty 50 remains an attractive choice as long as the fundamentals of the economy remain healthy.”

Commenting on the recent market volatility, Sanctum says while much of the noise over geopolitical tensions can be ignored, valuations, rising crude and volatile rates are concerns.

The report says, “North Korea sabre-rattling has turned out to be noise, as expected. Trade war rhetoric is also looking to be largely noise, as expected.

“What's not been noise is crude. Crude has been, directly or indirectly, a contributor to recessions going back to 1973-74. The chart shows similarities to 2006 and 2010. 2006 led to a painful but short correction, with prices rising to $74, but markets recovered swiftly within a couple months. It took crude rising to $93, sub-prime and a general economic slowdown to start the great recession. 2010 had crude rising to levels of $94.75 in January 2011 at the market peak, before investors raised the white flag and a painful correction ensued with the Nifty falling 26 per cent. The upshot is that the past two cycles suggest that current crude levels —inflation adjusted—are tolerable at current levels.