Mid-caps can be good picks despite current downslide
Among all equity markets dips of late, mid-caps have fallen even more than the broader indices. To cite an instance on Tuesday, the Bombay Stock Exchange (BSE) Sensex fell by 1.25%, while the BSE Mid-Cap Index fell even more by 1.96%.
The BSE had introduced the Mid-Cap Index to track medium capitalisation companies.
“Yes, mid-caps have been underperforming the markets primarily on declining top line for most mid-cap companies spread across the thematic universe,” said Mayuresh Joshi, vice-president, institution, Angel Broking.
But these stocks also present a hidden opportunity.
Joshi is positive on Goodyear India. He has a target price of Rs 345 on the stock that closed at Rs 314 on Tuesday on the BSE. He is also positive on United Phosphorus that is expected to post 12% and 14.2% compounded annual growth rate (CAGR) in sales and profit after tax (PAT), respectively. He has a target price of Rs 232 on the stock which on Tuesday closed at Rs 137.
Also, the RBI’s actions play a major role in the fall of mid-caps. “RBI’s move to restrict liquidity impacts mid-caps to a higher extent as working capital cycles tend to become even longer and interest costs higher,” said Ravi Shenoy of Motilal Oswal.
Finally, investment patterns in the equity markets also hit mid-cap valuations. Domestic institutional investors have been continuously selling over the past 18 months and retail investors have lost a lot of money over the past five years and most of them have lowest appetite to accumulate the stocks.
“On the other hand, the FIIs (foreign institutional investors) who are the net buyers of equities in the current year are largely focusing on large-cap stocks. Hence, there is no adequate demand for mid-cap stocks, and therefore, even the stocks of mid-cap companies which have come out with good results keep falling,” said G Chokkalingam, managing director of Centrum Wealth Management.
Investors need to have a deeper view of mid-caps, experts said. As an example, Chokkalingam cites Hexaware that on speculation fell by 15 to 20% in the past year, but rose by 57% in a month’s time.