Nifty Midcap 100 set to outrun Nifty 50 for fifth straight financial year

As things stand, the small-and mid-caps look relatively more expensive, said Jyotivardhan Jaipuria, founder & managing director, Valentis Advisors, and can underperform in the early part of FY26

The NSE Midcap 100 index is set to outperform the Nifty 50 index for the fifth straight financial year with gains led by state-owned defence, financial technologies (fintech) and consumer discretionary stocks.

 

Thus far in the financial year 2024-25 (FY25), the Nifty Midcap 100 index has rallied 8.1 per cent as compared to 6.0 per cent rise in Nifty 50 and 6 per cent gain in the NSE Smallcap 100 index, data shows.

 

Despite nearly 15 per cent correction from its all-time high level of 60,925.95 touched in September 2024, the midcap index has outperformed during the fiscal. The Nifty 50 and Nifty Smallcap 100 indexes, too, are down by 9.9 per cent and 18.3 per cent, respectively from the respective all-time highs. 

 

 

In FY24, the midcap index had surged 60.1 per cent as against 28.6 per cent rally in Nifty 50. In FY23, the midcap index had gained 1.2 per cent, as compared to Nifty50’s negative 0.6 per cent return, while, the smallcap index slipped 13.8 per cent.

 

The rally in the midcap stocks in FY25 was driven by liquidity from domestic institutional investors (DIIs), who pumped in a record ₹ 6 trillion in equities during FY25. Of these, mutual funds (MFs) invested in a net of ₹ 4.79 trillion.

 

Foreign portfolio investors (FPIs), however, reported a net outflow of ₹ 2.7 trillion in equities. Meanwhile, FPIs pumped in a net amount of ₹ 1.2 trillion in equities via primarily market route, data shows.

 

With the Nifty down 10 per cent from lifetime highs and mid & small caps down 15-18 per cent, analysts believe valuations have become more reasonable and the present market provides lucrative opportunities for long-term wealth generation.

 

The small-and mid-cap segments, according to G Chokkalingam, founder and head of research at Equinomics Research, is likely to recover much faster than large-caps in the short-term, as retail investors' faith in the Indian equity markets still holds well despite FII withdrawal. 

 

“Valuation of a number of midcap stocks is now appealing after the recent correction. It is an ideal time to increase allocation to domestic equities,” he said.

 

Valuation wise

 

As things stand, the small-and mid-caps look relatively more expensive, said Jyotivardhan Jaipuria, founder & managing director, Valentis Advisors, and are likely to underperform in the early part of FY26. By FY26-end, however, returns from the large, mid, and small-caps, he said, are likely to be similar.

 

“We expect a high single-digit return from the markets in FY26. Large-caps’ valuations have become reasonable, and the market trades at around 18.5x one-year forward earnings, which is mostly in line with the 10-year average. Earnings growth, too, is likely to rebound to around 10 – 12 per cent in FY26. Liquidity is back in the system thanks to the Reserve Bank of India’s initiatives. FIIs are currently underweight India, and this is likely to change in the year ahead,” Jaipuria believes.

 

Among individual stocks, Mazagon Dock Shipbuilders zoomed 181 per cent to ₹ 2,614.50 from ₹ 932.05 as on March 28, 2024. Cochin Shipyard, Bharat Dynamics and Rail Vikas Nigam have rallied between 46 per cent and 67 per cent. 

 

Meanwhile, with election-led uncertainty over and growth-oriented Union Budget in place Pankaj Pandey, head of research at ICICI Direct expects corporate earnings to resort to double-digit trajectory starting FY26.

 

“Encouragingly, the global and domestic interest rate cycle has started its downward trajectory and should support equity valuations going forward,” Pandey said.