Midcaps down 26% from highs, more pain in store

The NSE Mid-Cap index has fallen 26 per cent from its all-time high hit in January 2018 and is trading at the lowest levels since February 2017. While share valuations, as measured by Price to Earnings Ratio, have fallen from their record levels in January 2018, the declines may be far from over. Here’s why foreign brokerage Credit Suisse believes there could be further downsides in smaller shares:

Valuations Remain High

The trailing Price to Earnings (P/E) ratio of the mid-cap index has fallen to 28 times from the peak of 48 times, but is still significantly higher than the range of 10-25 times seen from 2005 to 2015.

Premium Mid-Cap Valuations VS Nifty

The premium to the Nifty and BSE 500 index on trailing price-to-earnings basis has also fallen to 17 per cent and 5 per cent, respectively, but the average between 2005 and 2015 was a discount of 10 per cent. The P/E tended to bottom at 25-40 per cent discount levels which shows that support is far, said Credit Suisse.


Earnings Downgrade

Revisions for FY20 earnings have been much worse, and for these stocks, FY20 growth estimates are already 17 per cent compared to 24 per cent for the top 100 companies. There are only a handful of stocks where the trailing P/E is negative but EPS is seeing upgrades, the brokerage said.


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