Revisiting Mid-Caps

15 MARCH 2019

Mid-cap stocks have witnessed a sharp rally over the past few weeks, after underperforming Large-caps by ~20% in 2018. As on 15th March 2019, Nifty Mid-cap 100 Index was up 7% month-to-date and up 11% from its mid-Feb lows.

Over a 5yr and 10yr period, Mid-caps have returned a CAGR of 19% and 15% respectively (vs 10% and 13% for Large-caps).

Source: Bloomberg, Citi Research

Citi analysts see some uptick in investor interest in Mid-caps, as post the correction of past 1 yr, they appear to be more reasonably valued at slightly above the long-term average (one-year forward PE@ 0.4 x standard deviation above mean). Mid-caps are now trading at a discount vs Large-caps, which is a reversal from a premium position occupied through most of 2017 and 2018. Revenue and Operating profit growth has also been on an upward trend since 3QFY17 for Mid-cap companies.

One-year-forward PE: Mid-cap vs Large-cap

Source: Bloomberg, Citi Research

Historically, Midcaps have delivered positive returns every year following a negative year in the past 15 years (average return 59% for the positive years). Also, interestingly, all 3 election years (in the same period) have been good for mid-caps. In 2018 Mid-Caps corrected by ~13.5% and 2019 is an election year.

Mid-cap and Large-cap index performance over the past 15 years

Source: Bloomberg, Citi Research

India’s valuation premium to EMs has now moderated to 50% from over 70% in 2QFY19 (long term avg - 40%). However, given the domestic and global uncertainties (General Elections, Sino-US trade war, slowing growth in DMF flows), Citi analysts maintain an overall cautious view and remain selectively constructive on Mid-Caps.

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