CLSA advises focus on quality, growth visibility in mid caps

MUMBAI: With mid cap stocks trading at a high valuation premium over the benchmark indices, CLSA advises taking a cautious approach and said it would prefer those stocks that offer quality and growth visibility.

The Nifty Midcap100 Index’s one year forward valuation premium over the Nifty is close to an all-time high at 12.6% and significantly above the ten year average discount of 9.8%. CLSA said that the valuation premium has risen on the back of a 54% consensus earnings growth projection for the current financial year compared to 16% for the Nifty.

"Our analysis suggests that such high growth is largely driven by a rebound in materials/energy and PSU banks where sustainability of such high growth could be an issue. We hence advise a cautious approach with preference over quality and growth visibility," said CLSA in a note on Friday.

CLSA said Arvind, Crompton Consumer, Dr. Lal Pathlabs, IDFC Bank, IndiGo and Sobha are its key picks in mid caps.

CLSA said the high valuation premium of the sector leaders versus peers in some sub-segments offers interesting switch opportunities.

It recommends a switch to Crompton Consumer from Havells and to INOX Leisure from PVR. It also recommends a switch to Adani Transmission from JSW Energy.

Among NBFCs, CLSA recommends a switch from LIC Housing Finance to Indiabulls Housing.