Shift to large-caps expected as Smids are richly valued
₹14,400 crore in August after a five-month hiatus, according to NSE data. For instance, stand-alone mid-cap schemes of mutual funds attracted flows of ₹10,999.73 and small-cap schemes ₹21,803 crore from March to August. Large-cap schemes witnessed outflows of ₹4,676.95 crore in comparison.
What saved the day for large-caps was ₹1.69 trillion inflows from FPIs from March to August and part of ₹14,400 crore from retail direct in August flowing into them. However, the higher flows into smids have pushed their valuations way above the large-caps, and this could actually result in profit booking in them, said market experts. For example, current PE ratio of REC, one of the top mid-cap performers, at 6.29 times, is nearly two times its three-year average PE (3.4 times), while the top small-cap performer Suzlon Energy enjoys a PE of 66.68 times against the three-year average of 12.87 times.
In contrast, Nifty heavyweight Reliance Industries Ltd’s PE is currently 24.18 against its three-year average of 25.56, while that of another large-cap outperformer, Larsen & Toubro Ltd, is at 38.63 against the three-year average of 39.24, according to Bloomberg data. “While rising bond yields in the US could result in a possible 5% further correction in indices, my sense is that fund flows will be diverted from mids and smalls into large caps, given the relatively more attractive valuations in the latter over the next few months," said Nirmal Jain, chairman of IIFL Group. Dhiraj Relli, managing director and CEO of HDFC Securities, also expressed concerns about overheating following their recent surge.
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