Midcaps have been on a good run of late, with the BSE MidCap index hitting an all-time high last week. Keeping up its strong run, the index on Friday hit a new lifetime high of 27,294.10, surpassing its previous high earlier in the week.
A look at the the price-earnings ratio suggests that valuations have softened. According to the one-year forward blended price/earnings (weighted average of current and next fiscal year’s estimate, based on the number of days left in the present year), valuations had peaked in January, with the average midcap valuation being 31.27 on January 18.
On June 20, 2022, the average valuation was at its lowest of 20.51. At present, the same stands at 25.11. This indicates that the present valuation is 460 bps up from the June 20 lowest and 617 bps down from the January 18 highest.
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Experts say the better macro situation for the Indian markets has aided in the strong performance, with the trend looking healthy for the remainder of the year.
“Indian markets are currently in a consolidation zone, given the strong outperformance to global peers last year, rising global headwinds, benign domestic demand environment and the uncertainty on monsoons given the El-Nino expectations. Global markets have recovered from November lows despite the crisis in the banking system amid interest rates, slowing global growth and sustained geopolitical uncertainties,” according to Amnish Aggarwal, head of research at Prabhudas Lilladher, in an April report titled India Strategy.
Data show the midcap index has gained close to 17.3% over the past one year, while the small-cap and large-cap have gained close to 15.8% and 10.2%, respectively.
The softening of valuations has made midcaps more attractive. The top three performers were Varun Beverages (VBL), CG Power, and IDFC First Bank — all have given returns of more than 100% in one year.
Analysts say the fall in valuations has triggered an interest in midcaps, which is likely to continue for the next few months, thanks to the strong earnings season. “While there are laggards among midcaps, falling valuations have led to bottom-fishing. There has been selective buying, especially in the last two months. PepsiCo’s good showing even during the winter months gave a leg-up to VBL, which has been the outperformer. As regards IDFC First, it has benefitted from the good showing by the BFSI sector, which reflects in its stock price gains,” said Kranthi Bathini, director (equity strategy), WealthMills Securities.
He explained that the margin of safety — or the earnings gap between the fair and actual value — in CG Power is quite less, hence the valuation is stretched. There is, nevertheless, a buying interest in the stock as capital goods have been among the best performers in this period.
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VBL, with returns of 128.43%, has seen its market cap surge by Rs 61,683 crore, and the 12-month trailing PE multiple has fallen from 103.75 to 73.28. IDFC First, which has shown a 100.83% jump in price and Rs 25,622-crore surge in market value, has seen valuation plummet from 172.14 to 18.24, making it an attractive buy. CG Power, which has returned 109.69%, has seen its valuation surge from a PE multiple of 27.57 to 74.54.