Midcaps' premium over largecaps hits historic highs

The BSE Sensex rose 1.6 per cent on Tuesday as against the 0.8 per cent gain for the BSE Midcap index. One of the reasons for such a sharp difference in gains between the Sensex and the Midcap index was the valuation gap which has widened sharply over the past few months to reach historically high levels, with some mid-cap companies now commanding premium valuations versus their large-cap peers

The current trailing 12-months price to earnings multiple of the Sensex is 19.4, compared to BSE Midcap's 34.29. A year ago, PE for the Sensex was 20.57 while that of the mid-caps was a tad higher at 25. The BSE Midcap index has surged over 18 per cent so far this year as against 8 per cent rise in the Sensex.

"Theoretically, large cap PEs should be higher, considering their ability to derive higher revenue and profit growth due to their large size and dominant positions in their respective sectors compared with the mid-cap players," said Daljeet Kohli, head of research at IndiaNivesh Securities. "The current trend is because of excess liquidity. Going forward, this gap will have to come down either by surge in large-cap stocks or corrections in mid-caps," he added.