Domestic brokerage house ICICI Securities said valuation discount of mid and smallcap stocks over large caps in terms of earnings returns is currently relatively low at around 100 bps on TTM basis. However, they are yet to reach the peak optimism seen during 2017-18, where they traded at a premium to large caps.
On the other hand, the brokerage believes that the earnings growth of mid and small caps is expected to be well ahead of large caps (Nifty 50 index) in FY 22-24 which may support their valuation.
ICICI Securities recommends top stock picks Buy fundamentals from your mid and small cap coverage universe with ratings and valuations ranging from deep discount to premium on large caps.
Its top midcap stocks include NHPC, Ashok Leyland, Aditya Birla Capital, Tata Communications, TVS Motors, APL Apollo Tubes, Phoenix Mills, Trent, Gujarat Fluoro Chemicals, Kajaria Ceramics.
Meanwhile, CESC, Jindal Stainless, Equitas Small Finance Bank, Credit Access Grameen, Genus Power, JK Lakshmi Cement, Jyothi Labs, Greenpanel Industries, Inox Leisure, Sapphire Foods India, TCI Express are the top stocks in the smallcap space.
“The higher growth is due to the significantly larger impact of COVID on the mid and small cap space and the imminent opening up of the economy in the next two years, which is likely to show higher growth on a depressed basis. Mid- and small-cap sectors make up the bulk of the sectors most severely affected by COVID such as hotels, resorts, restaurants, cinemas, casinos, travel agents, travel bags, airlines, retail stores, capital goods, small banks and NBFCs. stated in the note.
The brokerage said normalization of excessive liquidity and rate hike expected by the US Fed will reduce the risk appetite of investors, leading to higher demand for large-caps to mid- and small-caps.
The views and recommendations given above are those of individual analysts or broking companies and not of Mint.
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