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The Nifty Midap Index has been on a record breaking spree. For the 13th consecutive month, the index has given positive return, which according to a study by Motilal Oswal Financial Services, has never happened before.
According to the India Strategy report of Motilal Oswal Financial Services, the NSE Midcap 100/NSE Smallcap 100 indices have generated consecutive positive monthly returns of 102 per cent/67 per cent in the last 13 months/8 months. “This is the best such period of consecutive months of positive returns for the NSE Midcap 100. The Nifty Smallcap 100 has bettered this only once in the past,” it said.
Surging small-caps
Twentytwo per cent of NSE Midcap 100 components and 23 per cent of small cap 100 components have more than doubled since January 2018 peak. Tanla Platforms was the top performer by gaining 1,740 per cent followed by Alkyl Amines (1,228 per cent), IOL Chemicals (620 per cent) and Deepak Nitrite (541 per cent)
However, 37 per cent of Midcap 100 and 43 per cent of Smallcap 100 components are yet to cross January 2018 peak, the report, analysed by Gautam Duggad and Jayant Parasramka said.
Nifty’s underperformance v/s the midcap index on a 12-month rolling basis is at the highest levels since the great financial crisis (GFC). For the Smallcap index, this rolling 12 months underperformance is at the same level as during the GFC.
“Despite these recent sharp gains, the NSE Midcap 100 and NSE Smallcap 100 indices have underperformed the Nifty since their previous peaks of December 2017. The Nifty has gained 51 per cent since December 2017, while the NSE Midcap 100/NSE Smallcap 100 have returned 28 per cent/6 per cent,” said the analysts.
Divergence in valuations
The Nifty Smallcap 100 has been trading at a premium to the Nifty for the first time since December 2014. It is trading at a premium of 7 per cent v/s an average discount of 21 per cent on a 12-month forward basis. Valuations for the Nifty Midcap 100 index are on par with the Nifty on a 12-month forward basis.
“However, if one were to remove loss-making companies from both the indices, then the Nifty Midcap/Nifty Smallcap indices are trading at a trailing P/E of 21x/23x FY21 earnings, at a marginal discount to the Nifty,” they added. Valuations, however, are hiding more than what they are revealing. If one looks at the trailing 12-month valuations for the NSE Midcap 100 and NSE Smallcap 100 indices, there is a wide divergence within the index, they further said.
The sharp outperformance of midcaps, bolstered by healthy earnings, improved sentiments, benign liquidity, and low cost of capital, has more than bridged the valuation gap v/s largecaps. Meanwhile, balance sheets and cash flows have improved in FY21 as corporates tightened costs and deleveraged, the report added.
Any risk-off owing to concerns over potential interest rate hikes may impact midcaps/smallcaps more in the view of MOFSL.
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