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Value buys will drive upside in midcaps: CLSA

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Mumbai: Headline valuations indicate further room for recovery in the midcap index, but this is likely to be led by stocks where investors perceive value, said foreign brokerage CLSA. Earnings downgrades for FY19 on midcaps have been significantly lower than Nifty, it said. The BSE MidCap index has gained 4.5% in the past two weeks and the SmallCap index has gained 7.5%, outperforming the benchmark Sensex which has gained 2.2% during the same period. CLSA also said the general elections during the first half of calendar year 2019 could lead to market volatility.

Midcaps have outperformed post-election outcomes in the last three cycles, it pointed out. “Considering that the spread over Nifty earnings growth is also likely to narrow in FY20, we believe tailwinds are lacking for midcaps in general, though good bottom-up opportunities are emerging post the correction,” CLSA said, adding that it would avoid stocks with high promoter pledging. The brokerage said around 40% of the midcap universe is trading below five-year multiples. “Our analysis suggests that 44% of the NSE Midcap companies (59) are trading below their 5-year average PE.

On PB basis, 41% of the companies (82) are trading below their 5-year average.

On the other hand, 49% of Nifty companies (43) are trading below their 5-year average PE multiple,” it said. The brokerage said that in the past, midcap stocks have typically bounced sharply from their lows. CLSA said it sees large dispersion in stock valuations with consumer and technology companies still trading above their 5-year averages, while stocks linked to capital-intensive sectors, such as power and EPC companies trading up to 56% below 5-year average valuations. The foreign brokerage in a separate report said it has added a midcap — Sadbhav Engineering — to its model portfolio.

Valuations of Sadbhav appear attractive and the stock trades at 7 times FY20 adjusted earnings despite the recent rally of 44% from its low, said CLSA. The weightage in Sadbhav has been added in place of funding in information technology sector where CLSA has reduced its overweight to four percentage points.




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