AMFI semi-annual stock categorisation: IRCTC, UPL among six large-cap stocks that could be downgraded to midcap category

In the Association of Mutual Funds in India's (AMFI) upcoming semi-annual list of stocks (classified by size) that will consider data from July'23 to December'23, eight of the mid-cap stocks, primarily from the financial services and PSU Banking space, may see an upgrade to the large-cap status.

The stocks include the likes of Power Finance Corporation (PFC), Indian Railway Finance Corporation (IRFC), Macrotech Developers, Polycab, REC, Union Bank, Shriram Finance, and Indian Overseas Bank (IOB).

Furthermore, as per estimates made by ICICI Securities, eight small-cap stocks, including Mazagon Dock Shipbuilders, Suzlon Energy, Lloyds Metals, Kalyan Jewellers, SJVN, KEI Industries, Exide Industries, and CreditAccess Grameen, can get upgraded to midcap status.

100 per cent of the upgrades from small to midcap and mid-to- large cap are likely to be driven by cyclical stocks, said the brokerage. PSU, financials, industrials, and consumer discretionary stocks are likely to significantly improve market cap size rankings, leading to upgrades within the market cap size categorisation (small to mid and mid to large caps), it noted.

According to the SEBI (Securities and Exchange Board of India) mandate, AMFI categorises stocks based on their six-month average market capitalisation. The first 100 companies are ranked as largecaps, 101st–250th midcaps, while the remaining, i.e., 251st and beyond, are categorised as small-caps.

58 stocks that are likely to be included in the small-cap basket will have a market cap of over US$2 billion, showing non-conformance with the global benchmark size range, the report said. 

Interestingly, the period of analysis, i.e., from July to December, witnessed significant outperformance by the small and mid-caps compared to the large caps. And given that, the upper threshold of market cap size for small-caps is approaching an all-time high of around US$3 billion, higher than the global size range taken for small-caps (US$300 million to 2 billion).

Globally, small caps are classified as stocks within the market cap range of USD 300 million to USD 2 billion, irrespective of their market cap rank. Hence, the current methodology of a rank-based approach may need to transition to a fixed interval method based on judgement at some point in time, as the brokerage underlined.

Based on the current market cap, around 58 stocks likely to be classified as small caps will have a market cap of over US$2 billion.

Likely downgrades

Stocks that may be downgraded from midcap to smallcap are Bata India, Aditya Birla Fashion, Bharat Dynamics, Sumitomo Chemicals, Laurus Labs, Navin Fluorine, Atul, Whirlpool, Vinati Organics, Crompton Greaves, Aarti Industries, Pfizer, and Rajesh Exports.

While the large-cap stocks that may be lowered in rank and feature in the mid-cap category include the likes of Tube Investments, Bosch, PI Industries, IRCTC, Adani Wilmar, and UPL Ltd.

Mid, small, and micro-caps current valuations

As against large caps, mid-, small, and micro-cap valuations are in a historically unattractive valuation zone. Empirical evidence indicates that such unattractive valuations can be sustained in a bull market environment if the growth outlook remains positive, notes the brokerage.