Anand Rathi optimistic on midcap, smallcap shares, expects at least 11% upside over medium term

Midcap and smallcap stocks have been under the scanner ever since market regulator Sebi flagged the emergence of froth in the segments. Amid growing skepticism among market participants and experts, brokerage Anand Rathi remains optimistic about the segment. 

The brokerage has listed the following reasons behind its view:  

• The exceptional performance of midcap and smallcap stocks relative to their largecap counterparts has historical precedence, particularly evident from 2014 to 2017  
• The remarkable gains in the past 12 months can be attributed to a rebound from the significant underperformance witnessed in 2018-19, and once again in 2022, which makes the recent surge a catch-up rather than an anomaly 
• The upswing in midcap and smallcap stocks is grounded in substantial earnings growth, with CAGRs of 30 per cent and 37 per cent since 2018 as against 16 per cent for large caps, respectively  
• Despite a noticeable decrease in risk-free interest rates, which typically warrant higher equity multiples, Anand Rathi analysts did not find froth in valuations  

The brokerage advocates a favourable stance on midcap and smallcap stocks from an investment perspective going beyond 12 months. 

Is there froth on Dalal Street? What kind of returns can you expect over the next one year?

According to the brokerage, the Nifty50 and the Nifty Largecap 100 are fairly valued, while froth exists in the Nifty midcap 150 and a considerable upside can be expected in the Nifty Smallcap 250. 

The current fair values of indices are based on earnings expectations and fair PE ratios vs current indices | Source: Anand Rathi

Long-term outlook (three years and above)

The brokerage expects Nifty50 to generate an annual average return of 11-13 per cent over the next three years.

With nominal GDP growth to the tune of 11-12 per cent, the Nifty earnings growth can be expected at least at a similar rate.

Medium-term view (1-3 years)

Anand Rathi analysts peg earnings growth of Nifty50, Nifty Largecap 100, Nifty Midcap 150, and Nifty Smallcap 250 during 2024-25 and 2025-26 to be robust, in all cases above 11 per cent.

The smallcap segment is expected to record strong earnings growth, according to the brokerage. 

Short-term perspective (one to three months) 

Anand Rathi expects relatively small short-term market corrections and does not see reasons for a significant market correction. 

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