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As the name suggests, a mid-cap company is in the middle of the pack, between large cap and small cap companies. Mutual funds which diversify investments in between mid and small cap companies are termed as mid and small cap funds. Here is an interesting article written by our Fund Manager “Atul Bhole” on “Case for mid-cap investing” for the Hindu Business Line.
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Monday , February 24, 2014
Case for midcap investini (also see in Jpeg)
Publication: The Hindu Business Line , Journalist:ATUL BHOLE, Edition:Pune/Delhi/Hyderabad/Chennai/Ahmedabad/Mumbai/Bangalore/Kolkata , Page No: 7, Location: MiddleCenter , Size(sq.cms): 320
Case for midcap investinig
ATUL BHOLE The Nifty and Sensex are close t o t h e i r p r e v i o u s h i g h s . However, the CNX Midcap and BSE Midcap indices are still hovering between 21 per cent and 37 per cent below their previous highs. These stocks provide a good investment opportunity over the next 1824 months. Wellrun midsized companies
have historically delivered phenomenal returns over longer time periods. Many such firms are driven by competent and motivated entrepreneurs. They d e v e l o p c o s tefficient s t r u c t u r e s , b r a n d s a n d distribution franchisesgrowth while maintaining good return ratios. Midcap companies typically
t rade at a discount to their largecap counterparts. When a g o o d q u a l i t y m i dsized company delivers consistent growth, returns from such a company can be twofo ld — through normal earningsled gains and rerating of valuation multiples. The figures in the table are
based on market close as on January 31, 2014. The stocks a n d r et u r n s a r e f o r o n l y i l l u s t r a t i v e pu r po s e s a nd should not to be construed as investment advice.
Worth exploring now? The discount between mid and largecap stocks is currently ruling at 2530 per cent, higher than the historical averages of 1520 per cent. Many midcaps are trading a t 911 times the forward multiple, compared to the historical averages of 1213 times. With sentiments improving, these midcaps have very good odds o f bounc ing back t o historical average valua
tions and providing superior returns . However , bot tomup s t o c k p i c k i n g w i l l b e o f i m p o r t a n c e . A l o n g w i t h sentiment improvemen t , ong round economic r ecovery, coupled with rates coming d own o v e r t h e n e x t 1 824 months, can provide relief to cert a i n m idcap companies. Du r i ng t he r unu p t o t h e recovery, today's concerns such as e longa ted working capital cycle, depressed growth rates and margins can improve and provide bigger upsides to the profi tabil i ty of midcap companies.
Essentials for investing The company's business and the market structure in which it opera t e s o u g h t t o b e u n d e r s t o o d . G o o d managements with competence and integri ty are essential . Bottomup stock selection is important even when one is going by the topdown theme. Be it consumption, export or infrastructure, any midcap company s h o u l d b e j u d g e d o n a standalone basis. Investors should lend a
careful look at parameters such as margin defence, return ratios, cash generation and capital alloca t ion decis ions over a period of time. Midcaps should be examined
on a t l e a s t two v a l u a t i on parameters P/E or P/B ratio or EV/EBITDA or DCF valuation. This exercise will help capture the risks exhaustively. Once an investing decision
has been taken, i t i s about patiently w a t c h i n g t h e investment grow for years. Finally what about risk and
volatility in midcaps? If the stock selection is done
properly, the degree of risk reduces notably. Secondly, if one has invested for a long period with conviction, the riskreward ratio will improve. One can actually use market volatility to add up good quality midcaps. Also, spread the risk across a
number of midcap companies.
(The writer is Fund Manager of Tata Mutual Fund)