Mid cap V/s Nifty: Small makes big - Views on News from Equitymaster

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Mid cap V/s Nifty: Small makes big

Nov 13, 2003

The gains made by the stock markets in the recent months have surprised many. Given the strong bottomline growth reported by India Inc and the potential that it has going forward, the valuations (12x) at which the markets were languishing, was certainly not justified and an upswing was imminent. However, the rate at which the markets have gone up has reminded some of the 2000 rally and the scam that followed. However, we look at one of the important aspects to prove our point and counter the skepticism. One important aspect that distinguishes this rally from the 2000 (software) rally is that it is a more broadbased one. This is evident from the fact that the broadbased NSE S&P CNX 500 has outperformed NSE-Nifty during the current bull-run. Moreover, the NSE S&P Midcap 200 has been the biggest gainer. This is evident from the following chart.

As can been seen from the above graph, while Rs 100 invested in Nifty on 1st April '03 would have translated into Rs 163 by 11th November '03, a similar amount invested in S&P Midcap 200 would have reaped an astounding Rs 213 during the same period. Even among the midcap 200 stocks, barring a few, all scrips have recorded gains on the bourses. So is this just the midcap bubble in the making or is there some justification for the price rise? Take a look at the following table.

Top 5 performers in Midcap 200
Company Change in price* 1HFY04 V/s 1HFY03
Topline growth Bottomline growth
Bongaigaon Refineries 530% 48% 203%
Sesa Goa 492% 83% Loss to profit
MRPL 478% 22% Reduction in losses
Lupin 357% 30% 66%
HCL Infosystems 355% 96% 968%**
* Price movements during the period 1st April '03 to 11th Nov '03
** Results for Sep quarter '03

As can be seen from the table, Bongaigaon Refineries was the top gainer with a price increase of 530% followed by Sesa Goa, Mangalore Refinery and Petrochemicals (MRPL), Lupin and HCL Infosystems. A stock price upswing can be justified by a strong improvement in the performance or good business prospects or if the company is making a turnaround.

Bongaigaon Refineries has recorded a strong 203% net profit growth. Moreover, its acquisition by IOC has further strengthened its growth prospects. Similarly, MRPL has been successful in bringing down its losses. This apart, given the fact that Oil and Natural Gas Corporation Ltd. (ONGC), which has acquired the company, is planning to make fresh investments into MRPL, has further improved the sentiments towards this stock. In case of Lupin, initiatives taken by the promoters to settle inter-group loans as well as the improvement in business prospects of the company in view of the growing generic markets seem to be the key growth drivers. HCL Infosystems on the other hand gave impressive results on the back of higher revenues from the office automation and telecommunication business.

Thus, impressive results and improved business sentiments seem to justify a stock price appreciation in the case of some of the midcap stocks, but certainly not the sharp upswing witnessed on the bourses off late in some other non-deserving stocks. Before investing in midcap stocks, investors need to realize that considering their size, there is an element of risk involved in these stocks. Investors should undertake a detailed study of the financials of the company and try to determine whether the revenue growth achieved by these companies is sustainable. This apart, the business prospects and management vision also needs to be evaluated. Finally investors should remember that although not a taboo, extra caution should be exercised while investing in midcap stocks.

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