Wednesday, December 29, 2010

Mid Caps - 2010 Review

Vidya Bala

BL Research Bureau

Mid-cap stocks could not prove their mettle against their large-cap peers in 2010, if the performance of BSE Mid-cap index is taken in to account.

This index, with a universe of about 280 stocks, returned 12 per cent in 2010 (up to December 27), marginally lagging the bellwether Sensex, which managed about 15 per cent.

Mid-cap stars of the erstwhile rally such as Punj Lloyd, OnMobile Global and Educomp Solutions witnessed steep declines anywhere between 25-50 per cent this year.

However small-cap stocks as represented by the BSE Smallcap index surpassed broad market performance with 22 per cent return.

Late bloomers

Mid-caps are known to be late bloomers, typically gaining pace in the later part of a rally. In the 2007 rally for instance, the Mid-cap index convincingly outperformed its larger peer by over 20 percentage points. But mid-caps are yet to emulate this performance in the two years since the market recovery from March 2009 lows.

Delayed pick-up in earnings growth could be a key reason that can be attributed to the sluggish performance.

After a 12 per cent drop in their profits in the June quarter over a year ago, mid-cap companies expanded their earnings by a healthy 28 per cent in the latest, ended September quarter. The valuations offered to mid-cap stocks too suffered in the early part of the year as a result of poor earnings growth.

Price earnings multiple for the BSE Mid-cap index, for instance, was in the range of 17-18 times until June this year and moved to 20-22 times in October, after the results season.

Large-cap companies on the other hand have seen steady improvement in their profits; although clocking a more sedate 12 per cent growth in earnings in the September quarter over a year ago. Strong financial performance exhibited by large players such as Tata Motors, Hindalco and ITC helped the stock market performance of the bellwether stocks.

Sector tilt

Higher weights to outperforming sectors also played a part in the outperformance of the Sensex over mid-caps. With heavy weightage (as much as 40 per cent) given to outperforming sectors such as finance and IT, Sensex was a clear winner. Unfortunately, the Mid-cap index, despite its tilt towards the finance segment, was pulled down by the housing and construction space, which has the second highest weight in this index.

Corporate governance issues have also cast a shadow on this market-cap segment. The mid-cap index has in fact declined 12 per cent in less than two months now, after a series of negative bulletins such as corporate lending scams as well as allegations of promoter rigging stocks prices broke out. However if one looks at stock performance, a number of mid-cap stocks have been star performers in 2010.

Stocks such as Coromandel International, Tube Investments, Bajaj Finance and United Breweries attracted attention for doubling their stock prices over the last one year. In fact one half of the BSE mid-cap universe delivered returns of over 15 per cent year-to-date, even as a third of the universe sported declines. In contrast, the best stock in the large-cap universe, Tata Motors delivered 65 per cent over this period.

Valuation gap

The lacklustre performance of the mid-cap index has however meant that unlike the 2007 rally, when mid-caps narrowed the valuation gap with the Sensex; the BSE Mid-cap index' price earnings multiple at about 19 times now is well below the Sensex valuation of 23 times. If companies in the segment continue to do a repeat of their September quarter earnings, 2011 could provide scope for mid-cap companies to play catch-up.

Source :

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