Strategy: SMIDs haven’t hit the skids (just yet)

8 Sep 2023 , 11:35 AM

Small/Midcap indices have outperformed Nifty by >25% in 6 months. But, a Growth & Return Adjusted PE (GRAPE) score of 700+ stocks shows that midcaps are only 4% richer than large caps, and smallcaps are at parity. Besides, at 18.8x, the Nifty50 multiple is not nosebleed. So the GRAPES aren’t exactly sour. However, SMID stocks are more exposed to slowdown/downgrade risks. Analysts of IIFL Capital Services also amend their top-picks list to drop BoB, NTPC, APL Apollo, PNC Infra, KIMS, PowerMech (under restriction) — all of which have done very well — and introduce Info Edge, CMS, MCX, Ashoka Buildcon, Kaynes and Zee, which carry attractive upsides. In top sells, analysts of IIFL Capital Services remove IRCTC and Wipro and introduce Reddy’s, Delhivery, Page and TechM. 

SMID earnings growth has beaten large caps’: 

A 30-35% rally in Mid and Smallcap indices in six months vs just 11% in Nifty, makes SMID look rich. But, historical trends (FY03-08, FY08-19, and FY19- 23) suggest that smallcaps earnings growth > midcaps’ > large caps’, providing cover. Large/mid/small classification is frozen at the beginning of each period throughout this note, rather than analysing the index (with continually changing constituents) earnings. 

Midcaps 4% richer than large caps, smallcaps almost at parity: 

Hence, analysts of IIFL Capital Services look at Growth & Return Adjusted PE (GRAPE) score across 700+ companies. Analysts of IIFL Capital Services give equal weights to RoE, EPS Cagr and PER, and since RoE is also generally a growth driver, growth has the bigger overall weightage. Midcaps are indeed more expensive than large caps, albeit only by around 4%, and smallcaps not by much. In Dec2007, at the peak of a furious bull run, midcaps were somewhat richer relatively than now. Nifty PER was also 8% higher than now. 

SMID more exposed to slowdown risk, however: 

SMID stocks would be more exposed to global/India slowdown risk, though in the last three months they have seen upgrades. Major risks are persistent inflation and longer period of tight monetary in AEs, somewhat stretched public finances in India, spike in crude, and general elections.