Analysts turn cautious on mid-caps

BSE , NSE mid-cap indices hit all-time highs in intra-day deals

Shares of mid-cap companies are on a roll with the S&P BSE Mid-cap and the Nifty Mid-cap 100 indices hitting their lifetime highs in intra-day deals on Monday. Since the presentation of the Budget in February when the sentiment turned positive for the overall market, the S&P BSE Mid-cap index has outperformed the markets by rallying around 26 per cent. By comparison, the S&P BSE Sensex and the Nifty 50 indices have gained 20  per cent and 21 per cent, respectively.



Although analysts say the markets could see higher levels in the days ahead, they suggest that investors book profit at regular intervals, especially in the mid-cap segment that has outperformed the benchmark indices.

“The recent fall has brought back retail investors into the market, which is driving the stocks. That apart, investors are also now factoring in the possibility of a cut in interest rates in August, which will help a lot of companies in the midcap segment. Having said that, there is not much confidence in the overall market rally continuing,” says Ravi Shenoy, vice-president for mid-cap research at Motilal Oswal Securities.

“On top of this, when the mid-caps start to rally with a lot of these counters hitting upper circuit filters, one starts to become circumspect. We are advising our clients to be cautious and to stick to quality names. Can Fin Homes, Manpasand Bevrages, Zensar Technologies and Escorts are some of the stocks we still like in the mid-cap segment,” he adds.

Besides the hope of a cut in interest rate, the market rally, especially in the mid-caps, has also been driven by a pick-up in monsoon and hopes of passage of the goods and services tax Bill in the upcoming monsoon session of Parliament. That apart, analysts are hopeful that the worst may be getting over for India Inc as far as corporate earnings are concerned.

“We continue to believe that an earnings growth rate of 16-17 per cent for the market on a year-on-year (y-o-y) basis is quite likely for FY17. We expect the negative spiral of the earnings cut is largely over and Q1FY17 is unlikely to see an earnings correction cycle,” says Sanjay Kadam and Nipun Prem of Nomura in a report.

"Additionally, we expect the y-o-y impacts of commodity prices to start easing as the base impacts wither away. Thus, top line and bottom line would start to normalise on a y-y basis, with the full normalisation being achieved by October 2016. Thus, the second half of FY17F would have significant improvement in earnings on account of the base effects and the ongoing economic recovery," they add.

For A K Prabhakar, head of research at IDBI Capital, the rally in mid-caps still has some more steam as he expects the mid-caps to rise  15-20 per cent  despite the outperformance seen since February.

LIC Housing Finance, Cyient, NBCC, Himatsingka Seide, Arvind, Century Ply, Sundram Fasteners, City Union Bank and Lakshmi Vilas Bank are some of the stocks that he likes.