Don't make a panic exit from mid-caps

Experts say one cannot broad brush and exit from mid-caps at the moment as this is one category which can deliver better returns over a long period

2016 hasn’t started off in the best note for Indian equities with the CNX Nifty losing nearly 500 points (nearly six per cent) so far this year. What’s more worrisome is the mid-cap stocks faltering at a steeper pace. The CNX Mid-Cap index is down over 10 per cent, a fall of around 300 basis points more than the CNX Nifty since the start of 2016. With only a hand full of mid-cap stocks such as Torrent Power, Rajesh Exports, Indraprastha Gas, Emami and Mindtree (out of 100 stocks constituting the CNX Mid-Cap index) still in the green, questions surface on what investors should do with their mid-cap stocks.

Worries may compound if one notes that only 20 mid-cap stocks have survived the stock market carnage since the mid-cap index touched its peak August last year. Stocks from the banking space such as DCB Bank, Bank of India, Union Bank of India, Canara Bank have plunged by 43 to 50 per cent, while others such as Power Finance Corporation, Jubilant FoodWork, Sintex Industries, Apollo Types, and Gujarat Pipavav Port have declined between 35 per cent to 38 per cent since August 2015.

Dipen Shah of Kotak Securities explains that as several mid-cap stocks had run up much ahead of the large-caps last year, it is but obvious that mid-caps have ceded more than large-caps. Ajay Bodke of Prabhudas Lilladher is of the view that at this juncture large-cap stocks make for a better buy in terms of valuation compared to mid-caps given the recent correction. “As sanity returns in the market, large-cap stocks will be the first preference for institutional investors”, he explains.

That said, both experts feel that one cannot broad brush and exit from mid-cap stocks at the moment. Deven Choksey of KR Choksey Investment Managers too believes that an investor cannot make money (higher returns) in a market such as this if one does not invest in the mid-caps.

Take for example, the period from January 2015, where 41 out of 100 mid-cap stocks continue to stay in the green despite a tepid equities market. Much as in the case of large-cap stocks, mid-cap space too seem to have positiove bias towards defensives such as Natco Pharma, Ashok Leyland, Britannia Industries and Marico gained between 40 per cent and 60 per cent since January ‘15, while that of Rajesh Exports (up 377 per cent since January 2015) is an outlier in the pack of outperformers. Surprise entrants in the list are stocks from the non-banking financial sector such as Bajaj Finance and Bajaj Finserv with returns of 61 per cent and 44 per cent, respectively. Interestingly, with crude oil prices constantly making fresh lows and the outlook for gas availability improving, stocks in the oil and gas segment such as Hindustan Petroleum, Indian Oil, Gujarat Sate Petronet and Indraprastha Gas too continue to hold up their gains (up 20 to 45 per cent gains since January ’15).

Even on a longer time horizon, while the Nifty returned 19 per cent since January 2011, the mid-cap index grew by 36 per cent during this period, thus re-iterating the faith on mid-caps. Stocks such as Vakrangee, Bajaj Finace, Amara Raja Batteries and Page Industries have outperformed the mid-cap index by posting gains of 700 to over 900 per cent during this period, while the stock of Ajanta Pharma has risen from Rs 29 level in January 2011 to now trade at Rs 1,158. Only 34 out of 100 stocks would have been wealth destroyers in this period, thus indicating that the screening and cherry picking processes is the key to benefit from mid-cap stocks.

Choksey advices that investors need to pick debt-free companies which reinvest their surplus cash into the business, while being hedged against foreign exchange fluctuation. Bodke is of the view that mid-caps such as Suzlon, Cummins India, Bharat Forge, Shriram Transport will make a remarkable comeback when market recovers. Companies with strong businesses, focus on domestic markets and where regulatory interference is minimal, could be considered among mid-caps.