June 2020 marked the onset of unlocking and business resumption in
India. While Nifty 50 saw a 53 percent pullback since June 1, 2020, the Nifty Midcap Index sharply rebounded by over 70 percent and the Nifty Smallcap index witnessed the sharpest pullback of over 104 percent since June 1, 2020, brokerage house Jefferies stated in a report.
However, it added that while the current premium of Nifty Midcap PE to Nifty is at over 10 percent, their historical 10-year average PEs are broadly converging at 16x. Meanwhile, Nifty Smallcap still trades at a discount to Midcaps and Nifty, it noted.
The brokerage further observed that the best performers since unlocking and resumption have been Building Materials, Electrodes, Property, Industrials. Whereas Pharma has relatively underperformed.
Going ahead, the brokerage advises a bottom-up stock picking approach in the mid and smallcap space.
"Earnings growth could be aided by cyclical recovery in Property, Electrodes, Autos, select Industrials and Healthcare stocks. Average RoE is likely to expand by 520 bps to 19.2 percent by FY23 with better profitability. Key growth catalysts could be Govt. initiatives (eg: infrastructure, water, etc), housing revival, market share gains, indigenization, new product launches, and balance sheet strength," Jefferies pointed out.
Jefferies also listed its top picks in the mid, smallcap space. These stocks are typically key sectoral players, with strong market shares, robust catalysts, good balance sheet and return ratios, it noted. It includes Crompton Consumer, Blue Star, KEI Industries, Supreme Industries, Kajaria Cements, Ramco Cements, Oberoi Realty, Sobha, IPCA, Max Healthcare, Emami, Bharat Forge, Newgen, and MGL.
It also noted that the Nifty Midcap Index has largely outperformed both Nifty 50 and Nifty Smallcap Indices over the past 10 years
Historically, a phase of disruption has been followed by outperformance in Midcap and Smallcap indices (2009, 2016, 2017). The trend has continued with both the indices outperforming Nifty50 in CY20 and YTD CY21, it observed.
First Published: Mar 12, 2021 3:10 PM IST
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