Amid the ongoing correction in the stock markets, while large cap stocks have remained resilient, the midcap space has seen a heavy plunge.
Amid the ongoing correction in the stock markets, while large cap stocks have remained resilient, the midcap space has seen a heavy plunge. According to brokerage firm Motilal Oswal, midcaps now trade at a 14% discount to large-caps and offer relatively good risk-reward. Interestingly, the stock market in turning increasingly polarised, with just a few heavyweight names accounting for the bulk of returns. Notably, while the Nifty 50 is trading near the 11,000-mark, removing the top 10 scrips and making an index ‘Nifty 40’ would be trading at sub 9,000-levels, as highlighted by Kotak Securities in a recent report. “That divergence between these two segments of the market has become quite stark in terms of both performance and valuations – one trading at a substantial premium and the other at a huge discount to their long-period average valuations,” noted Motilal Oswal in its recent report.
In the report, Motilal Oswal found that stocks including Eicher Motors, L&T, ITC, M&M, Coal India and ONGC are trading at a deep discount. However, the firm noted that predicting the timing of fortune reversal for these names is always fraught with risks, more so in the current underlying economic scenario. Comparing the largecap stocks with the midcap space, Motilal Oswal said that there is limited headmroom for valuation re-rating in largecaps, and earnings recovery will be crucial for any upmove.
“Valuation headroom for the Nifty is limited in an environment of continued earnings downside risks, in our view. Progress of monsoon (began on a very tepid note with 38% deficiency as on 23rd June), the Budget, any potential government measures on consumption/liquidity and 1QFY20 earnings performance are the key near-term triggers for the markets,” noted the firm. While mid-caps trading at a 14% discount to largecaps offers good risk-reward, a positive market sentiment and a potential liquidity improvement in the economy are key pre-requisites for mid-caps to perform, in the brokerage’s view. Motilal Oswal’s top bets include Federal Bank, DCB, Indian Hotels, Crompton Consumer, KEC International, Ashoka Buildcon, ABFRL, Zensar in the midcap segment.
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