Revisiting Mid-Caps: Valuation Discounts may present selective Opportunities

12 December 2019

BSE Mid-cap index has underperformed benchmark Sensex by more than 30% over the last 2 years. While Mid-caps tend to perform better in times of steady economic growth, Citi analysts believe that select mid-caps may now present favorable risk-reward scenarios post the correction. While from a long term perspective, Mid-cap indices show similar performance as the Large-cap indices, they only seem to outperform the latter in full-scale bull markets.

Source: Bloomberg, Citi Research

As the below figure illustrates, Large-cap valuation premium over Mid-caps has reached close to its 10-year peak now, reflecting low expectations in the Mid-cap space. Note that in 2017, Mid-caps were trading at a high premium over Large-caps. Citi analysts believe that this swing represents a change in sentiments, from optimism to pessimism, in a reasonably short span of time.

Source: Bloomberg, Citi Research

Despite negative returns, AUMs for Mid & Small-cap oriented funds have continued to grow. Inflows into Mid & Small-cap funds grew 15% quarter-on-quarter in 2QFY20 to reach INR 66 bn, reflecting sustained domestic interest.

Within the Mid-cap space, however, Consumer Staples, Healthcare and Industrials appear more expensive than their Large-cap peers as per Citi analysts, while Financials & Energy appear more competitively priced.

Source: Bloomberg, Citi Research

Citi analysts believe that risk aversion following recent macroeconomic concerns may have created selective valuation-driven opportunities in the Mid-cap space. Please contact your relationship manager to understand how you can take advantage of these emerging opportunities.

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