Nuvama sees pocket of opportunities in small, midcaps, lists its top picks

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Midcap sector (SMIDs) have consistently provided higher investor returns. While challengers have continued to be in their respective categories as challenges, their sizes have increased over time, making them considerably more relevant in their ecosystems. In some SMID sectors, the brokerage thinks that the leadership definition may be expanding right now, and over time, the challenger's valuation discount to its market leader may be reducing.

According to Nuvama, it will initially consider a short list of a few of these potential candidates. Polycab, Blue Dart, Coforge, Escorts Kubota, Prince Pipes, PI Industries, BHEL, APL Apollo Tubes, and Sterling & Wilson are among the best SMID picks overall, according to Nuvama. “On SMID outlook, our markers show mixed indications.

Midcaps warrant caution (valuations are above mean), but we do not see this as a bubble. We also highlight pockets of potential upside (value stocks awaiting triggers; some others with high earnings growth certainty)," said the brokerage. Also Read: Is there a bubble in mid, small-cap space? Kotak and Nuvama slug it out According to the brokerage's analysis, it has been a significant supporter of market leadership among Indian SMIDs.

And it is clear that over time, leaders have generated outstanding returns, resulting in significant rating increases. While investors may benefit from earnings compounding, large outsized returns from leaders are unlikely in several categories because valuation multiples for leaders have re-rated 2–5 times over the past decade. "Market’s preference for leaders has meant that the challengers have remained relatively cheap in many categories, and we believe this is where the next set of outsized returns may potentially