Market Update

Monday, 5 December 2016

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Every third midcap stock has doubled since Modi election; gap with largecaps too high

Best Advisory Company While concerns over earnings growth and large companies' exposure to the capital-intensive sectors and overseas markets have weighed in on the performance of the largecap stocks for almost two years, roughly every third midcap stock has rallied over 100 per cent ever since Narendra Modi took oath as the 14th Prime Minister of India on May 26, 2014.

Data showed 39 of the 137 midcap stocks from the BSE Midcap and Nifty Midcap indices have surged between 100 per cent and 338 per cent since Modi became PM. This is despite the fact that the largecap benchmark BSE Sensex hit an all-time high of 30,024 in March 2015, and is now trading just 6 per cent higher from its May 26, 2014 close of 24,716.

Among the midcap stocks that have notched up big gains, Bajaj Finance  BSE 1.19 % has risen 337.81 per cent to Rs 880 from around Rs 200 in May 2014, Ajanta Pharma BSE 0.73 % has rallied 4.3 times to Rs 1,880-odd level from around Rs 430 in May 2014, Natco Pharma BSE 0.77 % has zoomed 4 times and Jubilant Life Sciences BSE 2.75 % advanced 272 per cent.

"I am positive on the pharma sector, but it is a difficult industry to track and find the right winners. So we buy into a basket of four-five stocks. I would prefer second-line pharma companies such as Strides ArcolabBSE 0.50 %, Cadila Laboratories and Ajanta Pharma," said Dipan Mehta, Member, BSE & NSE. He said these are few stocks where he and his clients may have invested.

Among others, SRF, Rajesh Exports BSE -0.07 %, Bajaj Finserv BSE 1.02 % and PC Jeweller have returned in excess of 200 per cent since May 2014.

It looks like calendar year 2016 will end up favouring midcap stocks for the third year in a row. The BSE Midcap index has gained 9.48 per cent this calendar against a 0.4 per cent rise in the BSE Sensex. In 2015, the index gained 7.43 per cent against a 5.03 per cent slide in the Sensex.

In 2014, when the Modi wave was at its peak, the BSE Midcap index soared 54.69 per cent against 29.89 per cent rise in the Sensex.

Data showed stocks such as HPCL BSE -1.69 % rose 199 per cent in just over 30 months on benign crude prices, direct subsidy transfer schemes and reforms in the oil and gas sector, while a jump in two-wheeler demand lifted shares of TVS VS Motor by 188 per cent.

Shares of CEAT, 3M India BSE 0.32 %, Bayer Crop Science gained between 167 per cent and 177 per cent during this period.

Sixty of the 137 midcap stocks gained over 50 per cent during this period, while 40 have given negative returns. The surge in many of the midcap stocks has made many of the experts to turn cautious on this space.

If the gap in valuation premium between largecap and midcap stocks shrinks to 10 or 20 per cent from around 50 per cent at present, we will have a look at it, said Chintan Haria of ICICI Prudential AMC.

"For that either the largecaps have to go up or the midcaps have to correct," he added.

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