Anand Rathi lists 4 reasons why small, midcap stocks will outperform in next 12 months

The near-term correction notwithstanding, Anand Rathi Shares & Stocks shares four reasons why it sees small and midcap stocks outperforming largecaps over the next 12
months.

Historical precedence: The exceptional performance of mid and over largecaps has historical precedence, particularly evident from 2014 to 2017.

Rebounding from lows: The remarkable gains in the past 12 months can be attributed to a rebound from the significant underperformance experienced in 2018-19, and once more in 2022, marking the recent surge as a catch-up rather than an anomaly.

Fundamental strength: The upswing in mid and smallcaps is grounded in substantial earnings growth, with a CAGR of 30% and 37%, respectively since 2018 versus 16% for largecaps.

Valuation justification: Despite a noticeable decrease in risk-free interest rates, which typically warrant higher equity multiples, we do not find froth in valuations.
In light of these factors, we advocate a favorable stance towards mid and smallcaps for an investment horizon extending 12 months.

At a time when the universe is talking about the formation of froth in the Indian equity market, Anand Rathi holds a contrarian view. It believes that 50 and Nifty Largecap 100 are currently fairly valued, while there is considerable upside to the Nifty Smallcap 250.

“Even if we tone down consensus earnings expectations and take valuation multiples lower than ‘normal’ in this phase of the business cycle, we observe no valuation froth,” the brokerage firm said.

The expected one-year return would be near the long-term average for Nifty 50 and Largecap 100, below the long-term average for Midcap 150, and significantly above the long-term average for Nifty Smallcap 250, according to Anand Rathi.

The brokerage expects earnings growth of Nifty 50, Nifty Largecap 100, Nifty Midcap 150, and Nifty Smallcap 250 in FY25 and FY26 to be robust at over 11%. In fact, it sees small-cap companies recording strong earnings growth.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)