Mid-cap stocks lose value in forward trade

Moderation in the mid-cap growth comes after the index outperformed benchmarks for 2 years in a row

The recent fall in mid-cap stocks has led to a sharp decline in their valuations.

The one-year forward price to earnings (P/E) ratio of the mid-cap index has come down to 15.4, a decline from 27.8 earlier in 2016, shows Bloomberg data. If these estimates are true, the valuations of the benchmark Sensex and the broader Midcap index on the BSE will converge for the first time since 2008.

This moderation in the mid-cap growth comes after the index outperformed benchmarks for two years in a row. During 2016, it rose eight per cent, against a 1.8 per cent gain by the Sensex. In 2015, the rise was 7.4 per cent against a five per cent decline in the Sensex.

“While the mid-cap (index) continues to be far ahead of the Sensex in terms of trailing valuations, there might be convergence on forward valuations, calculated on the target price and earnings estimate. A lot of brokerages have downgraded the target prices of various mid-cap stocks significantly, while keeping the earnings part largely unchanged. Hence, there is a steep decline in the mid-cap index's valuations,” said Amarjeet Maurya, senior equity research analyst, Angel Broking.

There has been buoyancy in the mid-cap space over recent years as the segment saw impressive growth. In the past two years, consumption and financial services' stocks in the segment have been among the most preferred bets for investors. “The valuation gap between the two in the past few years was on account of growth disparities. 

While mid-sized companies were growing at an impressive pace, there was a visible slowdown in the growth rates of large-caps,” says Prateek Agrawal, chief investment officer, ASK Investment Managers.

Market participants say the impressive inflows to mutual funds is another reason for the mid-cap rally. On the other hand, the slowing in foreign inflow seems to have hurt large-cap companies; they tend to be the key investors in blue-chip stocks.

Despite the dimmer outlook, a section of market participants continue to be bullish on select mid-cap stocks. According to Deven Choksey, managing director, KR Choksey Investment Managers, some mid-cap stocks are trading at very attractive valuations.