Should investors shift to mid-caps? | Outlook Business
Home  /  Markets  /  Trend  / Should investors shift to mid-caps? | JUN 27 , 2016

Trend

Should investors shift to mid-caps?
After gaining 11% in the past three months, the BSE Mid-cap Index is trading at 24x compared to Sensex’s 19x  

Ravi Shenoy, Vice president, mid-caps, Motilal Oswal Securities

Over the next one year, mid-caps will do well as they will be the prime beneficiary of falling interest rates and an easing working capital cycle. The central bank has already cut rates significantly and we expect another 25 basis points cut this year. Higher capacity utilisation will also aid earnings and margin growth in the coming months. For instance, smaller cement companies are operating at 60-65% capacity. Even if there is a 10% growth in demand, they will be able to enjoy higher utilisation, in the region of 70-72%. Besides, the Seventh Pay Commission hike and a good monsoon should drive demand. Even if we assume a 20% salary hike from July, along with arrears in September or October — coupled with a better monsoon — it will make for a potent combination. Festive demand will be robust and that will start reflecting in the second quarter. We believe investors should enter into some sound mid-cap stocks.

G Chokkalingam, CEO and founder, Equinomics Research and Advisory

Barring a few names, I see lot of bubble in the mid-cap space. Many of the companies have seen a steep rise in their stock price despite poor earnings visibility. Take sugar stocks, there is no reason to justify their steep run up. Stocks of companies with distressed balance sheets and corporate governance issues also have seen their prices skyrocketing. I would say two-thirds of the mid-cap universe is in the bubble zone and trading at a valuation that is not sustainable. While there is an uptick in earnings, it is only for a select few companies. Many mid-cap companies are still running huge inventory, and cash flow is an issue, with debtor days piling up. While mid-caps with good managements, balance sheets and valuations are a safer bet, on the whole, one should be cautious of investing in them at current prices. In the event of a meltdown in the market, mid-caps will see more value destruction than the large caps.

Here's your chance to read the latest issue of Outlook Business for free! Download the Outlook ​Magazines app now. Available on Play Store and App Store
On Stands Now