Use Dips to buy Midcaps

Mid cap stocks generally tend to be high beta counters. In other words they tend to outperform the broader markets in either direction. Also during euphoric times, mid and small caps available at cheap valuations and having a good growth story move up very swiftly and generate fabulous returns. We seem to be gradually drifting towards a euphoric market and hence advise investors with a penchant for risk to accumulate quality mid caps with strong growth prospects. Besides the expectation of buoyant market conditions, we recommend mid cap stocks due to some key observations discussed below.

- Strong growth in IIP numbers lends confidence to the economic recovery. Hence going ahead we expect the wide valuation gap between large caps and midcaps to narrow. Currently the large caps are quoting on an average 30-35% higher valuation than midcaps. Midcaps are likely to play catch up to largecap valuations.

- Improvement in availability of equity and debt is likely to ease liquidity pressures for Indian corporates. Also, with India being one of the few large economies to exhibit reasonable GDP growth, we expect foreign capital to continue to look seriously at India. This trend is already visible with a slew of successful QIPs witnessed over the past few months. Companies severely hit by the liquidity crisis last year are likely to stage a comeback as availability of funds improves.

There are plenty of mid cap companies where aggressive expansion plans got them into liquidity trap last year. Share prices of these companies collapsed last year after the world got enveloped into a financial crisis. Now most of these companies are in the process of raising capital to revive their expansion plans. This would result in significant earnings growth over the next few years. Therefore alongwith PE expansion their future estimated earnings are also likely to be raised upwards

- Many Indian corporates having undertaken cost rationalisation measures during the downturn. We expect an improvement in top line to drive strong EBITDA growth as revenue growth outpaces costs. This scenario will also be played out more prominently in the mid cap space.

Therefore use dips like the current one to accumulate mid caps with high growth potential and you are likely to multiply your capital manifold over the next 2-3 years. A word of caution here is that the journey in mid and small is always bumpy and volatile. These stocks are not meant for conservative investors who have limited risk taking capacity.