Mid Cap-Large Cap Play Off

19 July 2022

In early 2020, mid-cap index was trading at par with large cap index on valuations. Midcaps generally outperform in a bull market however long term returns are indistinguishable from large caps. The post-covid recovery as well as strong DMF momentum (particularly in smid & multi-cap funds) has resulted in strong outperformance for mid-cap index in CY20-21, taking it to a significant valuation (P/E) premium over large cap index. Domestic flows have been supportive of midcaps so far. Citi analysts advise watching out for domestic flows as DMF portfolio allocation is more weighted towards mid-caps than FII portfolios. Key Points appended below

• 1. Valuations and Flows: Citi analysts highlight that Mid-caps are continuing to trade at a premium to large-caps on P/E. Mid, small-cap and multi-cap mutual funds have seen higher net inflows since Oct'21 than large-cap funds in India.

• 2. Sectoral Outlook: Mid-caps in staples, utilities and materials trade at a significant premium vs large-cap peers. Financials and communication services trade at the highest discount vs large-cap peers.

Summary: Citi analysts prefer large caps to SMID in general given the risk and outlook. Domestic Flows continue to aid Mid-cap while Citi analysts see a better risk reward being offered in Large Caps. Mid-caps continue to trade at a premium to large-caps on P/E (at par on P/B). The ownership concentration by the  investor class indicates that FII ownership for the Top 30  co’s has dropped from 67.8% ( Sep’20) to 64.4% (Mar’22) while DMF ownership has gone up from 54.5% to 56.1% for the same time period.

For more updates please visit Citi Wealth Insights.