Since September last year, the NSE Mid Cap Index has recorded a dramatic rise, outperforming the Nifty. Retail and institutional investors are once again turning to mid-cap companies, many of which are riding the coat-tails of growth and optimism of small-town India
A year ago Tridib Pathak, a fund manager at IDFC Mutual Fund, quit his job and went on a road trip across India to observe “real growth” in tier-II towns. “Growth will come from these cities,” says Pathak. “There has been a change in sentiment about the economy as well as the markets in the last six months, and that is factored in the mid-cap segment.” Mid-cap companies in the consumer space are now riding on the growth of small-town India, though a chunk of their market share still comes from metros such as Mumbai, Bangalore, Chennai and Delhi.
Forbes India has compiled a list of 50 stocks that mutual funds have been purchasing over the last three years (see chart). It turns out that a large chunk of these are mid-cap stocks, which are considered to be high-risk and high-growth. But they need a stable external environment to function effectively. In the recent past, goaded by a lethargic economy, they have acquired a bad reputation, leaving scarred retail and institutional investors in their wake.
The NSE Midcap Index grew only by about 12 percent between May 2009 and September 2013, barely 2 percent higher than the Nifty, which recorded a 10 percent growth in the period. But this, say investors, is changing for the better. In fact, the market has recorded a meteoric rise since September 2013 when the Mid Cap Index began to rise. As of May 23, 2014, it was up by 56 percent, with the Nifty—which was up by only 33 percent—trailing behind.
Mid-cap firms started gaining traction in the investor community from the middle of last year. A Sebi directive in June added heft to this trend. Mutual funds got an opportunity to invest in mid-cap companies such as DISA Direct, Kennametal India, Styrolution ABS and Honeywell Automation. Under the norm, promoters were told to bring down their stakes to ensure their companies have a public shareholding of 25 percent by June 2013. This created an opportunity for funds to buy into closely held companies.
This eight-month surge—from September 2013 to May 2014—has made up for five years of lacklustre performance by mid-cap stocks, where growth was hampered not only by a slowing economy, but also high interest rates. The stock value of mid-caps such as Finolex Cables, HSIL and Sundaram Clayton has already moved up by 75 percent since January 2014.
(This story appears in the 27 June, 2014 issue of Forbes India. To visit our Archives, click here.)