Case for mid-cap investing
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Case for mid-cap investing

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As the name suggests, a mid-cap company is in the middle of the pack, between large cap and small cap companies. Mutual funds which diversify investments in between mid and small cap companies are ...

As the name suggests, a mid-cap company is in the middle of the pack, between large cap and small cap companies. Mutual funds which diversify investments in between mid and small cap companies are termed as mid and small cap funds.

Here is an interesting article written by our Fund Manager “Atul Bhole” on “Case for mid-cap investing” for the Hindu Business Line.

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Case for mid-cap investing Case for mid-cap investing Document Transcript

  • +          Monday , February 24, 2014    Case for mid­cap investini   (also see in Jpeg)    Publication: The Hindu Business Line , Journalist:ATUL BHOLE, Edition:Pune/Delhi/Hyderabad/Chennai/Ahmedabad/Mumbai/Bangalore/Kolkata , Page No: 7, Location: Middle­Center , Size(sq.cms): 320           Case for mid­cap investinig       ATUL BHOLE The Nifty and Sensex are close  to their previous highs.  However, the CNX Midcap and  BSE Midcap indices are still  hovering between 21 per cent  and 37 per cent below their  previous highs. These stocks  provide a good investment  opportunity over the next 18­24  months.  Well­run mid­sized companies  have historically delivered phe­ nomenal returns over longer  time periods. Many such firms  are driven by competent and  motivated entrepreneurs. They  d e v e l o p   c o s t­efficient  structures, brands and  distribution franchises­growth  while maintaining good return  ratios.  Mid­cap companies typically  trade at a discount to their  large­cap counterparts. When a  g o o d   q u a l i t y   m i d­sized  company delivers consistent  growth, returns from such a  company can be twof o l d  —  through normal earnings­led  gains and re­rating of valuation  multiples.  The figures in the table are  based on market close as on  January 31, 2014. The stocks  a n d   r et u r n s   a r e   f o r   o n l y   illustrative purposes and  should not to be construed as  investment advice.  Worth exploring now?  The discount between mid­ and  large­cap stocks is currently rul­ ing at 25­30 per cent, higher  than the historical averages of  15­20 per cent. Many mid­caps  are tradi n g   a t   9­11 times the  forward multiple, compared to  the historical averages of 12­13  times. With sentiments improving,  these mid­caps have very good  odds of bouncing back to  historical average valua­               powered by bluebytes tions and providing superior re­ t u r n s .   H o w e v e r ,   b o t t o m­up  stock picking will be of  importance. Along with  sentiment improvem e n t ,   o n­ g r o u n d   e c o n o m i c   r ecovery,  coupled with rates coming  d o w n   o v e r   t h e   n e x t   1 8­24  months, can provide relief to  cert a i n   m i d­cap companies.  D u r i n g   t h e   r u n­u p   t o   t h e   recovery, today's concerns  s u c h   a s   e l o n g a t e d   w o r king  capital cycle, depressed growth  rates and margins can improve  and provide bigger upsides to  the profitability of mid­cap  companies.  Essentials for investing  The company's business and  the market structure in which it  opera t e s   o u g h t   t o   b e   understood. Good  managements with competence  and integrity are essential.  Bottom­up stock selection is  important even when one is go­ ing by the top­down theme. Be  it consumption, export or infras­ tructure, any mid­cap company  should be judged on a  standalone basis. Investors  should lend a  careful look at parameters such  as margin defence, return ratios,  cash generation and capital  alloc a t i o n   d e c i s i o n s   o v e r   a   period of time.  Mid­caps should be examined  on at least two valuation  parameters ­  P/E or P/B ratio or  EV/EBITDA or DCF valuation.  This exercise will help capture  the risks exhaustively.  Once an investing decision  has been taken, it is about  patiently   w a t c h i n g   t h e   investment grow for years.  Finally what about risk and  volatility in mid­caps?  If the stock selection is done  properly, the degree of risk  reduces notably. Secondly, if one  has invested for a long period  with conviction, the risk­reward  ratio will improve. One can actually  use market volatility to add up  good quality mid­caps.  Also, spread the risk across a  number of mid­cap companies.  (The writer is Fund Manager of  Tata Mutual Fund)