 Most mid cap indices have outperformed the large cap indices by a wide margin, says a capital markets research report on Indian mid cap stocks released this week by Merrill Lynch in conjunction with its Indian affiliate, DSP Merrill Lynch. In 2004, CNX Mid Cap Index (CNXMID) and Junior Nifty Index, representing 200 and 50 stocks respectively have risen 58 per cent and 38 per cent respectively in the last one year. Against this, BSE Sensex has seen a 26 per cent rise and NSE Nifty Index has gained 24 per cent. The report forecasts (a) increased overall capex spends (60 per cent rise by 2007 to $208bn) and (b) sustained 'consumerism'. As a result, consumer discretionary stocks and companies linked to capital formation are the expected beneficiaries. For analysing the performance of the mid cap stocks, the report focuses on two broad indices, the Nifty 'junior index' (50 stocks) and CNXMID (200 stocks), given its larger basket. Highlights: Mid caps in India have outperformed the broader indices. For instance, CNX Midcap Index (representing 20 stocks on the NSE) has risen 58 per cent (over the last 12 months) vis-àvis a 24 per cent rise seen in Nifty and 26 per cent in the BSE Sensex. The 200 companies in the CNXMID index have registered strong revenue and profit growth over the last five quarters - on average 64 per cent of the CNXMID companies witnessed an excess of 50 per cent growth in profits. The report cites a number of fundamental and technical reasons for the mid cap rally. Fundamental: -
Mid cap companies (forming part of CNXMID Index) have seen their revenues grow (on strong demand and commodity upcycle) -
Cost controls (both fixed and variable costs) and -
Balance sheet restructuring, which cumulatively have led to a sharp improvement in ROE (up from 3 per cent to 10 peer cent in the last 3 years). Outlook for 2005-06: With rising interest costs, limited areas for further cost cutting and margin pressure on continued cost-push, the report see a move towards, what it calls, 'quality' midcap companies.?While momentum could remain popular for some time, the report says, quality would remain the focus area and therefore, the need for 'stock picking.' Sectors: The report also forecasts continued interest in commodities like sugar (despite the cyclical upturn which it says would continue) sugar, retailing, paints (despite rising raw material costs), hotels, power ancillaries, gas pipeline companies, textiles and engineering companies. Key risks: Liquidity risk in mid caps remains high, especially in volatile. Note: Merrill Lynch has cautioned that it may have a business relationship with some of the companies dealt with in the report.
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