Mid-caps could outperform small-caps in 2018: Experts

Year 2017 has been exceptional for the markets, with the benchmark as well as broad market indices being re-rated in advance. Indices have gained despite macro-economic challenges and without any earnings recovery. Mid- and small-caps have outperformed the benchmark as usual. While Nifty 50 has gained 26 per cent year-to-date, Nifty Mid Cap 100 and Nifty Small Cap 100 have jumped 39 per cent and 47 per cent, respectively.

When there is an economic recovery, small-caps outperform mid-caps, which in turn outperform the large-caps. While the same is expected to continue in 2018, the gap in gains between small- and mid-cap indices will either narrow or mid-caps could even outperform small-caps, going ahead.

This is because things have changed post-demonetisation and GST. Mid-cap companies are better placed in their businesses, have better balance sheet strength and provide better liquidity (exit the stock) than their small-cap counterparts in the same sector. Take jewellery companies for instance.

Titan Company (mid-cap) and PC Jeweller (small-cap) have had phenomenal runs on the bourses in the last one year. PC Jeweller has, in fact, outperformed Titan by a huge margin in the past three-year period. However, in the first half of FY18 (post-demonetisation and GST), Titan has seen faster growth in its business than PC Jeweller with year-on-year jump of 36 per cent and 80 per cent in sales and profit, respectively, compared to 23 per cent and 34 in case of the latter, according to data provided by Capitaline.

According to analysts’ estimates, Titan offers better net profit growth CAGR of 33 per cent compared to 30 per cent for PC Jeweller over the next three years (FY17-20), though sales growth CAGR of 21 per cent is expected for both companies. Thus, Titan is seen as a better play than PC Jeweller, going ahead. Titan is not only the market leader among organised jewellery players but also offers a wider product category like watches, eyewear and so on. PC Jeweller is predominantly dependent on seasonal business like wedding jewellery unlike Titan.

According to a Motilal Oswal report, jewellery has the largest share of the unorganised segment among all consumer categories, both in absolute terms (₹1.4 trillion) and percentage terms (70 per cent). Higher the share of unorganised market in a sector, mid-caps are likely to gain more than small-caps even among listed players.

Edelweiss Mutual Fund believes that Nifty Midcap is still quoting at 40 per cent discount to Nifty 50 on price to book value multiple basis. It argues that P/BV is a better parameter for comparison as earnings have been depressed.

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