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This article is more than 3 year old.

Midcaps: Multiples still expensive despite correction

Midcaps: Multiples still expensive despite correction
Mid-cap indices have under-performed large-cap peers year-to-date, reversing a three year trend. Valuations, however, still remain at a premium to the large-cap indices.
The correction, so far, has happened despite inflows into mid-cap focused funds growing faster than the overall equity asset under management (AUM) growth.
Acknowledging that there will be always interesting mid-cap ideas, we remain cautious on the overall category and prefer large caps.
  • Strong Flows into Mid-Cap Funds Have Continued
  • For the set of 90 mid-cap focused funds that we have analysed, inflows into mid-cap focused funds continues to remain strong, rising from Rs 214 billion in cumulative net inflows in financial year 2017 to Rs 362 billion in financial year 2018. Total AUM has doubled in the last two years, from Rs 620 billion in financial year 2016 to Rs 1.2 trillion in financial year 2018.
    • Earnings Expectations Still High
    • The fourth quarter earnings so far is decent for both large-cap and mid-cap companies. Revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) have been on an improvement trend over the past three to four quarters.
      Looking ahead, based on bottom-up aggregated estimates, we expect earnings or operating performance trends for the mid-cap universe to improve in financial year 2019.
      In our view, several drivers of earnings growth recovery in financial year 2019, (decline in credit costs for public sector undertaking banks, margin expansion in material sector) carry the same "will it materialize this year?" risk of recent years. Further, macro downside drivers also exist this year, given crude price rally and possibility of interest rate hikes.
      • Stay Cautious and Selective
      • Given sustained foreign institutional investors (FII) outflow pressures, premium valuations and worsening domestic macro, market fundamentals look entirely dependent on domestic inflows unless earnings trajectory shifts. In this environment, we would prefer to stick with stocks with reasonable valuations in the context of growth opportunity. Our Chartered Institute for Securities & Investment (CISI) also suggest modest, single-digit 12 million forward returns and our Sensex December 2018 target is 35,700.
        • Citi's Mid-Cap Screen and Top Ideas
        • We provide a screen from our mid-cap coverage space, filtering for market capitalisation of Rs 100-300 billion; trading volumes, financial year 2017-2019 earnings growth and FY19 Return On Equity>10%.
          We have made changes to our mid-cap picks–our top mid cap picks are Apollo, Crompton, Dalmia, Dilip Buildcon, Emami, Exide, GSPL, JSW Energy, MMFS, Petronet LNG.
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