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On Dalal Street, midcaps are the new bluechips; to gain most in case of recovery
Foreign institutional investors (FIIs) have struck gold in the midcaps. Quality midcap stocks have had a spectacular run on the bourses in the past three months as FIIs shifted money to beaten-down shares from large caps. The valuation gap with large caps is at a record high and has served as a strong lure for investors, analysts said.
The BSE Midcap index has surged 15% in the past three months compared with the anaemic 2% gain in the Sensex. Stocks such as Aurobindo Pharma, PI Industries, TVS Motors, Arvind, Infotech Enterprises, Just Dial, Info Edge, Apollo Tyres and Indian Bank have surged between 50% and 100% during the period.
Fund managers believe that even with this kind of increase, mid-level companies are still cheap and that these are the stocks that will bounce back sharply when the economy turns around. India's economy slumped to a decade-low 5% in the year to March 2013 and while the chances of a revival are receding, the government expects a strong second half will mean full-year growth remaining at last year's level.
"Midcap stocks, which have been beaten down sharply in the past few years, are currently trading at 30-40% valuation discounts to large caps," said Sunil Singhania, chief investment officer (equities) at Reliance Mutual Fund. "In case the economy recovers earlier than expected, these are the stocks to give spectacular return and we are positive on this space."
FIIs pumped more than Rs 40,000 crore into Indian equities in the October-December quarter after investing just Rs 1,048 crore in the July-September period. Overseas investors exited emerging markets in panic during the September quarter amid fears of the US Federal Reserve rolling back its bond-buying programme, returning in the next quarter after this concern became less acute.
FII stakes in many mid-level companies such as eClerx Services, Polaris Software, Amara Raja Batteries, Aurobindo Pharma, Persistent System, Petronet LNG, HDIL, Natco Pharma and Omaxe surged during the December quarter. The rupee, which hit an alltime low of 68.85 on August 28, has strengthened 9.5% since then, thanks to their return. Fresh money, from overseas investors, is chasing quality midcap stocks.
It makes sense for FIIs to buy at current levels, said Daljeet Kohli, head of research at India Nivesh Securities. "Indian stocks are still cheaper in dollar terms. Further, many quality stocks have declined sharply in the past few years," Kohli said. "Large-cap stocks have already run up and their valuations are stretched currently."