Why it’s time to re-look mid-cap space seriously

Hearing only gloomy story all around except about India's benchmark indices? The second quarter gross domestic product growth rate was 4.5 per cent as against 7 per cent during corresponding period of last fiscal (2018-19). This is the lowest growth rate seen after fourth quarter (January-March) of 2012-13 and the sixth successive quarter of declining growth.

And worse, India’s industrial output contracted for the second straight month. The Index of Industrial Production contracted 3.8 per cent over a year ago in October 2019, according to a statement by the Ministry of Statistics and Programme Implementation.

The Reserve Bank of India has once again downgraded it's GDP growth forecast to 5 per cent for the current fiscal. It has revised the growth to 4.9-5.5 per cent in H2 and 5.9-6.3 per cent for H1 2020-21.

Reflecting all this, during the first seven months of the current fiscal, the net collections from direct taxes and the Goods and Services Tax were just 38 per cent and 49.21 per cent, respectively, of the Budget Estimates (BE) for the full fiscal year.

So, is it time to quit stock markets, especially the volatile mid-cap space? If one looks some of the signals and trends closely, it may in fact be a time to look at the mid-cap space seriously.

Midcap stocks were battered for two consecutive years (2018 and 2019). The Nifty Midcap 100, after registering it's peak in early 2018, crashed 30 per cent by October this year. However, since then, the index is showing some stability and recovered around 7 per cent. Historical data indicates the under-performance of mid-cap indices is always followed by periods of strong out-performance by them.

PE ratio halves

The PE ratio of the Nifty Midcap 100 index has corrected from over 54 in January 2018 to the current level of 24.5. At a time when PE ratio of BSE Sensex and Nifty50 are defying gravity, the correction in mid-cap stocks offers opportunity to investors. Another important indicator that ponits a likely bounce back in midcap space is the share of B-group stocks in BSE's overall market capitalisation. Currently, B-group stocks (largely mid-cap stocks), contribute just 5 per cent to the overall market cap. During the hey days of 2016 and 2017, the B-group had contributed over 15 per cent if the market cap. So, a catch up is likely sooner or later.

Lastly, the stock market largely discounts news flows ahead of the fact, betting on future with uncanny accuracy. The best time to invest is when there is an extreme pessimism.

However, given the corporate governance issues and liquidity concerns, it would be difficult for retail investors to directly identify individual mid-cap stocks. However they can take exposures through mutual fund investments.