The Sensex trades at 16.2x 12-month forward PE. HSBC classifies stocks between Rs 2500 to Rs 4,00 cr market cap as a Midcap.
Why Midcaps ?:
The case for investing in mid-caps lies in cheaper valuations, trading at 10.7x 12-month forward PE, which is at a 28% discount to large-caps, while the valuation discount of midcap stocks tends to persist for a longer period of time.
On average, in terms of PE, the discount is 17%. Consensus forecasts that mid-cap stocks will grow earnings at a CAGR of 16.2% compared to an 11.5% CAGR for large-cap stocks over March 2009-March 2011e. We believe this makes for a compelling case for investment in mid-cap stocks.
This segment of the market has outperformed large-cap peers historically. The risks of investing in this segment relate to higher liquidity risk for mid-caps and higher leverage.
Triveni Engineering, Marico Industries and Voltas are the stocks recommended by HSBC with target prices of Rs 120, Rs 83 and Rs 150 respectively.