Large caps present compelling opportunities amid market volatility

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Large-cap stocks have grown in favour after the recent correction and may offer better reward-risk balance to investors given more reasonable valuations compared with a wide section of mid- and small-cap stocks.

The recent correction in mid- and small-caps has been relatively much smaller compared to the rally seen over the past six to seven months.

The Nifty 50 has shed 3.4 per cent in the last one month. The Nifty Midcap 100 and the Nifty Smallcap 100 have slid 4.8 per cent and 0.3 per cent, respectively, in the same period. In the year-to-date, these indices have rallied 23 per cent and 30 per cent, respectively, compared with 5.2 per cent gains made by the Nifty.

Valuations of the Nifty-50 index has become more reasonable at 17.5 times the estimated FY25 earnings per share given moderate earnings growth and muted performance over the past two years, according to Kotak Institutional Equities (KIE).

The brokerage expects net profits of the Nifty-50 Index to grow 15 per cent in FY24 and 12 per cent in FY25.

“We do not find value in most mid- and small-cap stocks in our coverage universe given the extent of re-rating in multiples seen in the past 9-12 months despite weakening business models and eroding business moats,” said KIE in a note on Friday.

The performers

The brokerage finds value in a few large-cap stocks and the BFSI sector but finds most stocks in the consumption, investment and outsourcing sectors richly valued.

Consumption stocks do not factor in weak demand in the near term and weakening business models in the medium term. Consumption demand continues to be muted due to weak growth in quality jobs and high inflation in various consumer products over the past 4-5 years, the brokerage said.

Investment stocks have delivered strong returns over the past 6-12 months on expectations of strong recovery in the domestic capex cycle. Strong government capex this fiscal has supported this narrative. However, private corporate capex appears to be sluggish given weakening gross fixed capital formation and gross domestic product despite strong government and household capex and tepid recovery in sanctioning of long-term loans for projects.

“Given the uncertainty and the recent correction, large cap valuations seem more compelling than the mid and small caps,” said Kranthi Bathini, Director of Equity Strategy at WealthMills Securities. “Investors can use the current correction to accumulate the stocks on a longer term basis.”



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