FIIs raise stake in over 30 midcaps in December quarter; will they turn up to become next wealth creators?

Foreign Institutional Investors (FIIs) have raised stake in as many as 34 companies in the S&P BSE Midcap index so far during the quarter ended December, a Trendlyne data as on 18 January, showed.

Small & midcap indices outperformed benchmark indices in 2021, and the momentum continued in 2022 as well. The S&P BSE Midcap index rose over 37 per cent while the S&P BSE Smallcap index closed with gains of over 60 per cent compared to 24 per cent upside seen in Nifty50, and 22 per cent gain in Sensex.

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One prime reason which is pulling the FIIs towards the small & midcap space is the potential growth. Small & midcap companies could deliver strong earnings as economy picks up pace.  

“The price trend shown by the small and midcaps could be one of the reasons why FIIs are investing in them. FIIs would most likely be looking at the valuation of the companies and the earning growth trends while making the picks,” Sonam Srivastava, Co-founder, Wright Research, said.

“Mid & small-caps tend to show more rapid growth rates than large caps just because of the economy of scale, and the valuation for some of the smaller companies has corrected a lot during the last quarter and has become attractive,” she said.

Some of the companies in which foreign investors showed their interest sequentially include names like Macrotech Developers, Supreme Industries, Voltas, Canar Bank, Bharat Electronics, Page Industries, Apollo Hospitals, and Sun Tv etc. among others.

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FPIs raised a stake by over 6 per cent in Macrotech Developers, 5.7 per cent in Supreme Industries, and 2.1 per cent in Voltas on a sequential basis.

Experts are of the view that all these 3 companies have carved out a niche in the segment in which they operate. “We like Voltas more for longer-term portfolio as other two companies are operating in sectors which are in a strong cyclical upturn, which makes them attractive for the medium term,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities, said.

“We will advise investors to book profits, as and when growth starts to taper down in their respective sectors. Macrotech Developers is benefitting from Real estate cycle (particularly Mumbai) and Supreme Industries is benefitting from PVC cycle,” he said.

Sonam Srivastava of Wright Research highlighted that Macrotech Developers (Lodha) is a well-known real estate firm that has logged pre-sales of Rs 2608 cr for the quarter ending December 2021 (Q3FY22), rising by 40% YoY.

“The real estate sector is desirable as we are in a growth cycle and could get attention in the Union Budget. Macrotech has formed11 JVs since April 2021 to develop Rs 14,500-cr projects. With FII entering, Lodha is a lovely long-term opportunity,” added Srivastava.

Supreme Industries enjoys a much fairer valuation than its peers and has delivered good profit growth of 34.01% CAGR over the last five years. This company is also a great long-term buy, highlighted Srivastava.

And, for Voltas, she added that the consumer discretionary company is engaged in room air conditioners, contract revenue, commercial refrigeration products, and sale of services.

“It is debt-free but slightly overvalued, as a result, it can be a good bet for the reopening trade when consumer discretionary would be favored,” she added.

Valuations:

According to the Bulls & Bears report by Motilal Oswal Financial Services (MOFSL), midcaps have outperformed largecaps over the last 12 months.

The Nifty Midcap100 P/E now trades at a 14% premium to the Nifty. The Nifty closed higher for the fifth straight month in September 2021.