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Market Watch: Spotlight turns to mid-caps

Now, with the Nifty being so utterly range-bound, there is no recourse but to hunt for stock ideas to generate returns, writes Udayan Mukherjee.

business Updated: Apr 09, 2008 22:06 IST
Udayan Mukherjee

As we enter the earnings season, the market is beginning to focus on individual stocks. This is a good sign. Until now, traders and investors were so overwhelmed by overall market risk that there was little mindspace for spotting individual stock price aberrations. Now, with the Nifty being so utterly range-bound, there is no recourse but to hunt for stock ideas to generate returns. It’s no coincidence then that mid-caps and small caps have outperformed the Nifty over the last ten days. This trend may well continue, if the Nifty trades in a narrow range.

Earnings, of course, will determine who can outperform. The start hasn't been too bad. Yes Bank's numbers bore none of the feared scars of derivative losses. If the larger private sector banks can demonstrate the same, the pall of gloom on this sector could lift somewhat. Mastek's numbers too, were well ahead of expectations. While it's too small a stock, it certainly highlights the cheap valuations of midcap tech stocks. Mastek is available at less than seven times next year’s earnings and the average price-earnings ratio for mid-cap infotech ranges between 6 and 10. Cheap. No wonder they all rallied yesterday.

What's good about the mid-cap upmove of the last few days is that the cats and dogs are not participating. Some cheap PSU banks, some good midcap pharma names, some midcap IT and a few commodities like sugar are leading; the momentum brigade stocks are still lying low. That raises hopes that this midcap upmove isn't an empty, speculative surge. We need more of it. On current earnings estimates there is value littered all over this space. The market just needs to be convinced.