CLSA analysis suggests that 44 percent of the NSE Midcap companies are trading below their 5-year average P/E, and on a price-to-book value basis, 41 percent of the companies are trading below their 5-year average.
The value is emerging in select bottom-up opportunities in the mid-cap space, CLSA suggests in a note because, despite the recent recovery, the midcap index has still underperformed the Nifty on a year-to-date (YTD) basis.
The valuation discount to the Nifty now stands at 8.5 percent. The earnings downgrades for FY19 on midcaps have been significantly lower than Nifty, which is a positive sign.
“A sectoral analysis highlights that recent stock performance is led by sectors where investors perceive ‘value’. We highlight that 40 percent of Nifty Midcap universe is trading below its 5-year average valuation, particularly in the Industrial and EPC space,” said the CLSA note.
Given high valuations in the consumer space, CLSA expects some churn here, but the global investment bank advises investors to avoid stocks with high promoter pledging.
CLSA analysis suggests that 44 percent of the NSE Midcap companies (59 companies) are trading below their 5-year average P/E, and on a price-to-book value basis, 41 percent of the companies (82 companies) are trading below their 5-year average.
On the other hand, 49 percent of Nifty midcap companies (43 companies) are trading below their 5-year average P/E multiple.
Generally, midcaps as a theme has done well post elections and the rally in the run-up to the event has already begun but one should stick to only bottom-up opportunities. Lok Sabha elections will begin on April 11 and polling would be held over seven phases till May 19, followed by counting of all votes on May 23, the Election Commission announced the dates over the weekend.
“The Indian national elections during H1CY19 could lead to market volatility. Midcaps though have outperformed post-election outcomes in the last three cycles,” said the CLSA note.
“Considering that the spread over Nifty earnings growth is also likely to narrow in FY20, we believe tailwinds are lacking for Midcaps in general, though good bottom-up opportunities are emerging post the correction,” it said.
There is renewed investor interest in midcap stocks though debate on the sustainability of the rally will remain. Hence, investors should be selective when it comes to mid-cap investing.
Investors can look at consumer, technology, power as well as EPC companies, highlights the CLSA note. “A sectoral analysis of recent stock returns within midcaps also suggests that stock performance is led by sectors with significant valuation gap vis-à-vis historical average,” it said.
CLSA sees large dispersion in stock valuations with consumer and technology companies still trading above their 5-year average valuations, while stocks linked to capital-intensive sectors like power and EPC companies trading up to 56 percent below 5-year average valuations.
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