Mid and smallcap stocks valuation discount over large caps in terms of earnings yield are relatively low currently at around 100 bps on a TTM basis, highlighted domestic brokerage house ICICI Securities . However, they have not yet reached the extreme optimism seen during 2017-18 where they traded at a premium to large caps.
On the flip side, the brokerage believes that earnings growth of mid and small caps is expected to be much ahead of large caps (Nifty 50 index) over FY22-24 which could support their valuations.
ICICI Securities has recommended top stock picks from its mid and small cap coverage universe with a fundamental Buy rating and valuations ranging from deep discount to premium over large caps.
Its top midcap stocks picks include NHPC, Ashok Leyland, Aditya Birla Capital, Tata Communications, TVS Motors, APL Apollo Tubes, Pheonix Mills, Trent, Gujarat Fluoro Chemicals, Kajaria Ceramics.
Meanwhile, CESC, Jindal Stainless, Equitas Small Finance Bank, CreditAccess Gramin, Genus Power, JK Lakshmi Cement, Jyothi Labs, Greenpanel Industries, Inox Leisure, Sapphire Foods India, TCI Express are its top stock picks in smallcaps space.
“The higher growth is attributable to the significantly larger impact of covid on mid and small cap space and the imminent opening up of the economy over the next two years which is likely to show higher growth on a depressed base. Mid and small caps have the lion’s share of the most severely impacted sectors due to covid such as hotels, resorts, restaurants, cinema, casino, travel agents, travel bags, air lines, retail stores, capital goods, small banks & NBFCs,” the note stated.
Normalisation of excessive liquidity and expected rate hikes by the US FED will likely reduce the risk appetite of investors, thereby, demanding higher earnings yield spread from mid and small caps over large caps, the brokerage added.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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