WHY THE MID-CAP RALLY IS IMPORTANT?

WHY THE MID-CAP RALLY IS IMPORTANT?

Even as the markets were busy discussing the pros and cons of the US-Iran war and the macro implications, an interesting event happened. The Nifty Mid-Cap 100 scaled new highs, which is surprising considering the current turmoil in the market. This happens at a time when the Nifty and Sensex are well short of their highs. The mid-cap stocks seem to have done something much better than the traditional large cap plays in India.

For starters, the signals were already there in the fourth quarter results. Mid-caps reported a sharp improvement in revenue growth, profit growth, as well as operating margins. Their focused business models with low levels of debt helped them handle the macro stress better. In select sectors, like IT, the mid-cap stocks showed higher flexibility and adaptability to the AI shift. But first, let us look at the sectors that drove mid-cap gains.

WHICH WERE THE BEST PERFORMING MID-CAPS?

To look at the mid-cap story purely in terms of returns would only give part of the picture. Hence, we look at 4 parameters. The short-term momentum is captured by the 1-month returns and the distance to the 52-week highs. The longer-term value is gauged on 1-year returns and bounce from the yearly lows. Once the mid-cap companies are ranked, we have taken an average to get the overall rank. Here is how the final ranking of mid-caps looks like.

The above list shows the 20 best performing mid-cap companies on 4 parameters. The overall rank is calculated by taking an average of the ranking by each of these parameters. So, this ranking is more comprehensive and captures the momentum and the structural attractiveness of the stocks. Let us turn to the sectoral mix of the top-20 mid-cap stocks.

SECTORAL BREAK-UP OF THE TOP-20 MID-CAP STOCKS

Here are some key sectoral mid-cap themes that emerged as the index touched a new high amidst the global turmoil.

Financial inclusion has the biggest representation with 5 companies viz., MCX, BSE, Aditya Birla Capital, L&T Finance, and Federal Bank. The focus has been on the last mile service providers that are actually making financial inclusion possible; be it in banking, finance or even capital markets. That is a role cut out for mid-caps.

Power sector is another major story, with dominance of power equipment. In fact, the top 3 are power equipment companies; GE Vernova T&D, Hitachi Power, and BHEL; with JSW Energy being the fourth power company to boot. These companies are a big bet on the emerging demand for thermal and renewable energy, amid rising power demand.

Healthcare sector is another space that has dominated the mid-cap top-20. It includes Laurus Labs, Glenmark, and Aurobindo. These 3 names are less vulnerable to the traditional US BGx plays; with focus on CDMO, domestic markets, and niche exports.

An interesting inclusion in the top-20 list are 2 companies from the FMEG (fast moving electrical goods) segment. Both Polycab and KEI Industries have benefited from their institutional and retail franchise and grown in tandem with rising power and housing demand in the last one year. FMEG companies are also getting pricing power.

Finally, metals is another sector where there are two representations from SAIL and NALCO. They have generally participated in the rally due to the rally in commodity prices as well as supply chain constraints in recent months.

Apart from the above, there are also select stocks, which are more standalone, rather than a representation of any sectoral trend.

WHAT DOES THE RALLY IN THE MID-CAP INDEX TELL US?

The rally in the mid-cap index is a clear indication that there are pockets of value in smaller stocks. Many of these stocks are either dependent on domestic consumer demand or domestic producer demand. If you look at the best performers, it is predominantly a domestic theme, which is less vulnerable to what is happening in the Middle East.

While financial inclusion is largely a consumer play, power equipment is largely a manufacturing play. The FMEG segment and the healthcare space are a mix of consumer and institutional plays. The moral of the story is that; amid the turmoil, it is these mid-caps that have been in a much better position to weather the storm and be profitable!