Valuations of midcaps, smallcaps rich, outperformance against largecaps may not continue, says Nuvama

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Nifty 50, Sensex at record highs; how should you play large, mid, smallcaps? Nuvama underscored that midcaps are also expensive but they should still do relatively better than smallcaps. "Midcaps are also expensive at 26 times P/E (versus 20 times 10-year average), but the sizes and profiles of midcap businesses in India have improved significantly in the past five–seven years. Midcap premium of 28 per cent to Nifty valuation (versus 7-8 per cent average) is also not supportive.

Hence, we think outperformance versus large caps hereon is highly unlikely. In a turn of events (market decline) though, midcaps are unlikely to do as badly as small-caps," said Nuvama. (Exciting news! Mint is now on WhatsApp Channels. Subscribe today and stay updated with the latest financial insights! Click here!) However, despite the segment's rich valuations, the brokerage firm pointed out that historically there have always been pockets of growth, favourable dynamics and stock performance.

Also Read: JM Financials upgrades Tata Power to ‘buy’ after shares hit 52-week high, sees 24% upside over revised TP Nuvama said the size of Indian midcaps now gives more comfort. From the beginning of the calendar year 2024, Nuvama estimates that the midcap market cap definition will be $2.8-8 billion (applicable to domestic mutual fund midcap schemes). This is a sizeable jump from the $1.2-3.5 billion, just four years back.

Nuvama said that the higher market cap range potentially increases the likelihood of the first 50-75 midcap stocks being treated as large caps by investors, and hence midcap drawdowns are unlikely to be as drastic as seen in history. Moreover, midcaps have had a good track record in terms of becoming large caps. "Our data shows that