Midcaps stocks have under-performed their large-cap peers so far in calendar year 2018 (CY18). On a year-to-date (YTD) basis, the S&P BSE Sensex has moved up 4% as compared to a 14% fall in the BSE Midcap index.
According to an Elara Capital report, the carnage among the midcap stocks was mainly due to lofty valuations, earnings disappointment, foreign portfolio investors’ (FPI) outflows and slowing mutual fund (MF) inflows. However, a sustained SIP flow is the only silver lining (May SIP at Rs 70 billion), the report adds.
Despite the correction, mid-caps still trade at a 6% premium to the large-caps. Going ahead, the brokerage expects the premium to shrink further. “In this current uncertain environment, it would be prudent to focus on large cap and quality midcap stocks with earnings visibility, superior management and low operating margin variability,” the report clarifies.
Basis its analysis of the mid-cap stocks, Elara recommends 14 stocks in this segment where it sees potential despite the sharp fall. The recommendation is based on stocks with market capitalisation between Rs 35 billion to Rs 300 billion, which have a track record of high and consistent on return on capital employed (ROCE), have increasing or stable operating margin, where free cash flow is positive and there is high revenue growth.
The chosen ones include Berger Paints, Kansai Nerolac Paints, Exide Industries, Whirlpool, Indraprastha Gas, Supreme Industries, Wabco India, Relaxo Footwears, Tata Elxsi, Avanti Feeds, Dr. Lal PathLabs, Zydus Wellness, V-Mart Retail and CARE Ratings.