Despite expensive valuations, large-caps saw more capital infusion rather than midcaps and smallcaps that are currently trading at a lower valuation.
Indian markets have witnessed pandemonium and uncertainty this year despite the robust performance of a few large-caps such as Reliance Industries, ICICI Bank, TCS, and others. As economic slowdown intensified, large-caps saw a surge of capital coming in as market participants saw it safe to park their money in companies with risk appetite. However, it is to be noted that despite expensive valuations, large-caps saw more capital infusion rather than midcaps and smallcaps which are currently trading at a lower valuation.
In terms of valuations, midcaps and smallcaps outperformed the large-cap index. Relative valuations of midcaps and smallcaps vis-à-vis Nifty50 has corrected back to 2014 lows.
This year, Nifty Midcap 100 and Nifty Smallcap 100 saw a de-growth of 5 percent and 11 percent respectively. However, when it comes to valuations, Nifty Smallcap traded at the lowest valuation of 13.84x while Nifty Midcap100 traded at 16.07x.
Axis Capital in its report said that midcaps outperformed large-caps significantly during March 2015- August 2018 period resulting in price outpacing earnings. It said, “Over the last 12 months, the huge gap between price and earnings is getting reversed with price now more in line with earnings expectations.”
Midcap valuations are now supportive as they have corrected sharply and are closer to pre-FY14 levels. On P/E metric, midcap discount to large-cap is now at a 7-year high. On P/B metric, midcap discount to large-cap is now at its 10-year mean (about 20 percent discount to large-cap), the report added.
Speaking on the same note, Elara Capital also noted that there are signs of market broadening from a narrow set of “high quality” performers. Expect this trend to continue among Nifty 50 stocks and more broadly across broader markets as well, the report said.
The market is shifting towards value and adds beta. After hanging in with high quality (high ROCE & ROE) for several months, YTD trends have started to accommodate “turnaround” performers (Bharti Airtel and Reliance), said the brokerage.