X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Midcaps: Potential to perform... - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Dec 22, 2006

    Midcaps: Potential to perform...

    The BSE-Sensex having gained 42% point to point so far in 2006 leaves very little room for investors to complain about their returns garnered from the index heavyweights. But where do we go from here on? Should investors continue to rely on the wishful thinking that the economic buoyancy would continue to propel the market capitalisation of large caps to higher trajectories? Or does this deserve a re-thinking?

    Rs 100 each invested in Sensex and BSE Midcap index at the beginning of the year would have yielded a return of Rs 42 and Rs 29 respectively till date. The fact that the Sensex has appreciably outperformed its midcap peer leaves us to wonder about the upsides from here on. A valuation of 21 times trailing 12-months earnings suggests that the Sensex has reasonably factored in some of the future gains. As against this, the BSE Midcap index, albeit comprising of stocks with high beta (risk association), does not seem to have been suitably rewarded for the high return ratios and incremental growth potential.

    India Inc. - Witnessing the 'SME uprising'
    India's liberalisation program has so far been very successful in developing a large-sized private corporate sector. However, companies form the small and medium-scale (SME) sector have grossly under performed their larger counterparts. A combination of improving domestic demand due to higher employment and per capita income is likely to drive a significant change in the SME sector as the larger corporates fail to cater to the entire demand.

    Neglected so far...
    The two most important factors that caused this conspicuous gap in performance of the large companies versus SMEs is the availability of infrastructure and access to capital. While their larger counterparts managed to side step this hurdle by investing in captive electricity, port and transport facilities, the SMEs suffered from the lack of resources. Not surprisingly, over the last few years, the share of SME in overall exports has been stagnant. In addition, the share of bank credit to this segment failed to garner a substantial pie until the last 2 years due to lack of credit rating.

    Potential triggers to value unlocking...
    Retail revolution: Globally, organised retail players tend to source about 30% to 50% of their supplies from small and medium scale industries. A large number of their supplies are in form of private label products, and SMEs are best placed to meet this demand. We believe that large Indian retail chains will nurture the SME sector to cater to domestic demand. However, the challenge is to get the SME sector to build capabilities to meet the cost and quality requirements of the discerning overseas consumers. Also, it needs to be comprehended that growth will not be without competition. Unlike India, China developed a globally competitive SME sector before it developed a large-scale network of organised retail chain stores. Moreover, China has already built in economies of scale advantages in certain goods where it will be difficult for Indian players to compete in the near term.

    Nonetheless, higher domestic demand and subsequent improvement in the competitiveness of SMEs in complying with the requirements of the domestic and overseas customers should eventually allow them to increase their market share in global exports.

    Pace of infrastructure development: Currently, except for telecom, the cost of most utility and infrastructure services in India is estimated to be 50% to 100% higher than that in China. For instance, the average electricity cost for manufacturing units in India is roughly double that in China. Similarly, the average cost of freight payments as a percentage of imports is about 10% in India, compared to around 5% in developed countries and an overall global average of 6%.

    Having said that, the lack of basic infrastructure facilities and low (as compared to what is required) government spending on infrastructure is impeding efficiency of production for the medium scale enterprises. China is estimated to be spending seven times as much as India on infrastructure (excluding real estate) in absolute terms. In 2003, the total capital spending on electricity, roads, airports, ports and telecom was US$ 150 bn in China (10.6% of GDP) compared to US$ 21 bn in India (3.5% of GDP). However, given the set of reforms being introduced by the government for different sectors to accelerate infrastructure spending (including support to institutions like IDFC), the country's infrastructure investment is expected to touch US$ 47 bn (4.7% of GDP) by FY09.

    Although this is still significantly lower than the required levels, it should provide some support to the SMEs. In addition, the government's liberal policy for SEZs (special economic zones) is seen as a step towards the emergence of large multi-product SEZs, to bridge the gap for lack of quality nationwide infrastructure availability, thus facilitating the growth of SMEs operating in their vicinity.

    Conclusion
    While the BSE Midcap index is not a very apt representation of the SME segment per se given the limited representation of companies in the index, what needs to be kept in mind is the fact that the representation is only set to multiply as companies mature to the benchmark performance levels. Also, while most large cap stocks - given the fact that they are widely tracked - tend to most often factor in considerable upsides, the mid caps offer ample opportunities for value buyers. It is for investors to reckon this opportunity and carefully select / research the 'Infosys in the making' that deserves a place in their portfolio.

     

     

    Equitymaster requests your view! Post a comment on "Midcaps: Potential to perform...". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    The Key Factor Pushing Gold Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 22, 2017 10:57 AM

    MARKET STATS