Tuesday, July 9, 2013

Why invest in midcaps?

Midcap stocks historically have demonstrated superior returns relative to large cap stocks over a longer period of time. Yet, investors remained underexposed to this part of the equity market segment. Mid-caps are hidden gems, provide a leveraged play, compliment large cap portfolio and provide better diversification.

Over the last 10 years period (1st April 2003 to 30th June 2013) CNX Midcap(100) index delivered an impressive annualized return of 22.68%, while the Nifty index returned 18.98%. Contrary to the general perception, mid cap indices have shown lower volatility (Standard deviation) of 24.65% compared to over 25.77% for nifty.

CNX Midcap Index has exposure to 29 industries against 17 in the CNX Nifty. In terms of concentration, there are only four industries with more than 5% exposure in the mid-cap index compared to nine for the CNX Nifty Index. The top 10 stocks by weightage in CNX Midcap is 22.11% vs Nifty at 58.18%. Thus, greater diversification and lower concentration help lower the risk.

Apart, CNX Midcap Index has a 23% allocation to defensive sectors such as consumer staples and pharmaceuticals that are less volatile, while the CNX Nifty Index has 10% allocation to these sectors.  Indeed, CNX Midcap Index is more diversified vis-a-vis the CNX Nifty Index at both sector and stock levels.
With close to 80% of revenues coming from domestic sources, midcaps have grown faster than Indian economy and large caps.
Particulars Dec-05 Dec-09 Dec-12 7 Yr CAGR
Nominal GDP Growth (%) 14.4 16.8 12.4 17.10%
Sales Per Share        
CNX Nifty 1273 2397 3566 15.80%
CNX Midcap 2485 5862 9384 20.90%
Earnings Per Share        
CNX Nifty 184 208 361 10.10%
CNX Midcap 198 403 564 16.10%
Mid cap index is currently trading at an attractive PE multiple of 9 and 7.44 for the FY 14 & FY 15 respectively.
Measure CNX Nifty Index     CNX Midcap Index    
Fundamentals Current FY 14 FY 15 Current FY 14 FY 15
EPS 360 489 557 476 829 1003
Dividend per share 92 117 134 127 160 168
Book value per share 2321 2966 3458 5384 6427 7155
Sales per share 3297 4376 4706 8378 10578 11369
Price/EPS 16.27 11.98 10.52 15.7 9.01 7.44
Dividend Yield 1.57 2 2.29 1.7 2.14 2.26
Price/Book 2.52 1.97 1.69 1.39 1.16 1.04
Price/sales 1.78 1.34 1.24 0.89 0.71 0.66

The flip side is, mid-caps are under researched and so are the associated risks. Investors should avoid taking stock specific bets and rather use ETF platform to play the mid cap story. Alternatively, those seeking alpha may consider investing in actively managed mid cap mutual funds. Interestingly, the top 10 mid cap funds delivered an average annualized return  of 16.22% for the last 5 year period.
Happy investing!
Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments


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