Don't press the panic button yet in midcaps, say analysts

Despite the recent fall, the NiftyMidcap100 index has outperformed by gaining 20% thus far in CY17

Nifty Midcap 100 index hit two-month low of 17,039 on the National Stock Exchange (NSE) in intra-day trade on Tuesday, after a sharp decline in stocks like Jubilant FoodWorks, Power Finance Corporation and Rural Electrification Corporation. The index is at its lowest level since March 30, 2017.

At 10:23 am; the Nifty Midcap 100 index that was trading at 17,166 levels, has underperformed the market, falling 7.2% from its all-time high closing level of 18,948 on May 16, 2017. By comparison, the Nifty 50 index has gained nearly 1% during the period.

"I think it is a normal unwinding by the investors. In every bull-run, the midcap index rises more than the S&P BSE Sensex and the Nifty50 indices, and falls sharply in case of a correction. Investors tend to invest in mid-and small-caps to make money faster and sooner than the large-caps and when the tide turns, the rush to exit is also fast. I don't think there is cause for concern yet," says Deepak Jasani, head of retail research at HDFC Securities.

Between January and May 16, the Midcap index had rallied 29% against 16% rise in the benchmark index. Despite the fall, the Nifty Midcap 100 index has still outperformed the market by gaining 20% thus far in the calendar year 2017, as compared to 17% gain in the Nifty 50 index.

"The recent fall in the midcaps has been a combined impact of earnings not meeting expectations in some cases and the fact that there could have been leverage positions in some. That apart, investors are booking profits where they have made money. Having said that, I don't see signs of a panic selling as of now. There needs to be a big sell-off in the large-cap segment for panic selling to set in, which is not visible as yet," explains Prakash Diwan, director, Altamount Capital Management.

Among individual stocks, Reliance Infrastructure, Reliance Power and Reliance Communications from Reliance Group, Alembic Pharmaceuticals, Torrent Pharmaceuticals, Sun Pharma Advanced Research (SPARC) and Ajanta Pharma from pharmaceuticals hit their respective three-month lows on the NSE.

In fact, most ADAG Group stocks have tumbled between 15% and 36% over the past two weeks till Monday on mounting debt concerns.

"I have never been a big fan of the AGAD Group stocks and believe they are getting what they deserve. On the other hand, I think the pharma stocks are close to bottoming out. Pharma is not a story that one can write off. On the contrary, one can buy on a decline from a two year perspective," Diwan adds.

Steep price erosion in simple generics in the US, tough stand by US FDA on compliance and the appreciating rupee are major headwinds for the pharma industry, analysts say.

"The shift to complex generics will be a long process, which will require change in top level mindset, capital commitment and R&D (research & development) focus. In the interim, companies will have to build scale of business outside of US to deliver modest revenue growth. Valuations are still elevated and can correct further. No pharma stock is part of our model portfolio," cautions Amar Ambani, head of research at IIFL.

As regards the mid-caps, analysts say the nervousness can partly be attributed to the ongoing March 2017 quarter results season, as investors align their portfolios to the performance of the companies in the recently concluded quarter and the guidance.

"The road ahead for the midcap index will depend on how the frontline benchmark indices perform. A fall in the large-caps can extend the correction in the midcaps. We are still around 7% away from the near-term high in the Nifty Midcap index. Breaching that on the upside seems difficult in the near-term," Jasani of HDFC Securities suggests.

Adding: "That apart, we are in the results season and hence, the movement in individual stocks will also depend on the results declared and the guidance given. I think the nervousness in the midcap space will continue for another fortnight. However in the interim some intermittent bounce back in the index and individual stocks may be witnessed."