Midcap Over-Ownership & Over-Valuation !!

Retail Inflows continue to be strong

But Sebi categorization of Stocks > 33k cr Mkt cap being considered Midcap has led to over-ownership and overvaluation in the Top Midcap & Smallcap ( > 20k cr )

Data from Monarch AIF Note

1) Price CAGR >> Earnings CAGR

Nifty50 and Nifty500 have moved inline with earnings cagr.

NiftyMidcap 100 has seen max re-rating. A price cagr of 27.3% against 11.7% earnings.

2) Concentrated Flows

Mid + Small + Thematic = 55-60% share of MF pure equity net inflows in CY23 and CY24

3) OverValuation and Over-Ownership of 101st-350th

Median P/E for the basket of 101st to 350th Mcap stock has expanded by a whopping 66% from 25x P/E in FY19 to 42x P/E at Dec-24 end (TTM basis)

Meanwhile Promoters do QIPs, Stake Sales. FIIs selling too.

4) Our Take

The Over-Ownership in Stocks/Sectors due to Flows in a particular theme or in the current case regulatory imperative has been the standard case in Indian?Markets.

This starts initially with a Price Correction and Timewise correction for 1-3 or more years.

?

Some examples

1) The Trivedis of 2018-2020.

• Large Heavyweights kept on making new highs but the Smallcap Index was down 40%.
• The same stocks now have underperformed Nifty and Broader Markets. ( Kotak 5 yr return is zero)

2) The Digital and Covid Revolution of 2021

• IT companies, SMS companies and many more had a solid run in 2021.
• 3 year return is 0 to -30%.

3) The Rush to Quality with High ROCEs.

• Paint Companies to Chappals and what not quoted at high PEs and were invincible.
• Now gone

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What to Do?

• 101-350 many great companies with Legendary Valuations.
• A time correction of 1-3 years or more -?Avoid/Reduce Allocation.
• FOCUS Market Cap Agnostic. ( Large / Small )
• BalanceSheet > PnL.
• Valuations > Quality
• Future > Past.
• Stocks > Sector.

Be Open-minded.