From Adani Power to Bata India, best mid-caps after market correction

Post its outperformance in FY17 and for some part of FY18, the Nifty Midcap 100 index has lagged leading indices such as the Nifty 50 over the past year and a half. For the year-to-date, it has shed over 15 per cent, which is more than double that of the leading index. After trading at a 14 per cent premium to the Nifty a year ago, the Nifty Midcap 100 is now trading at a steep 20 per cent discount to the index of 50 large companies. In fact, the combined market cap of the mid-cap index at Rs 14 trillion is now at a six-year low.  

Though the correction in Indian markets has been due to its slowing economy, weak corporate earnings growth and global trade-war worries, investors are increasingly getting risk averse preferring larger companies to ride out the volatility. While it may take time for the markets to recover, the sharp correction offers opportunity for investors to buy quality names in the mid cap space at lower valuations. Moreover, over longer periods mid-caps are known to deliver higher average stock returns than their larger peers.

Given the size of the companies, experts, however, advise that investors be cautious about stocks which are lower down the market capitalisation order. This is because cost of funds tend to move up during uncertain or volatile times. Companies which have excess debt and weak cash flows will struggle in this environment and the highly leveraged ones should be avoided. Companies mentioned here are those that have lower levels of leverage, are expected to grow at a healthy rate over the next few years and are available at reasonable valuations. Moreover, they are expected to deliver a return of at least 15 per cent over the next year.