Retail Inflows continue to be strong
But Sebi categorization of Stocks > 33k cr Mkt cap being considered Midcap has led to over-ownership and overvaluation in the Top Midcap & Smallcap ( > 20k cr )
Data from Monarch AIF Note
1) Price CAGR >> Earnings CAGR
Nifty50 and Nifty500 have moved inline with earnings cagr.
NiftyMidcap 100 has seen max re-rating. A price cagr of 27.3% against 11.7% earnings.
2) Concentrated Flows
Mid + Small + Thematic = 55-60% share of MF pure equity net inflows in CY23 and CY24
3) OverValuation and Over-Ownership of 101st-350th
Median P/E for the basket of 101st to 350th Mcap stock has expanded by a whopping 66% from 25x P/E in FY19 to 42x P/E at Dec-24 end (TTM basis)
Meanwhile Promoters do QIPs, Stake Sales. FIIs selling too.
4) Our Take
The Over-Ownership in Stocks/Sectors due to Flows in a particular theme or in the current case regulatory imperative has been the standard case in Indian Markets.
This starts initially with a Price Correction and Timewise correction for 1-3 or more years.
Some examples
1) The Trivedis of 2018-2020.
- Large Heavyweights kept on making new highs but the Smallcap Index was down 40%.
- The same stocks now have underperformed Nifty and Broader Markets. ( Kotak 5 yr return is zero)
2) The Digital and Covid Revolution of 2021
- IT companies, SMS companies and many more had a solid run in 2021.
- 3 year return is 0 to -30%.
3) The Rush to Quality with High ROCEs.
- Paint Companies to Chappals and what not quoted at high PEs and were invincible.
- Now gone
What to Do?
- 101-350 many great companies with Legendary Valuations.
- A time correction of 1-3 years or more - Avoid/Reduce Allocation.
- FOCUS Market Cap Agnostic. ( Large / Small )
- BalanceSheet > PnL.
- Valuations > Quality
- Future > Past.
- Stocks > Sector.
Be Open-minded.
