India Strategy - Post-covid growth impulse largely emanating from mid By ICICI Securities
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Post-covid growth impulse largely emanating from mid/small caps although low valuation discount over large caps and reducing risk appetite to act as headwinds
Mid and small cap valuation discount over large caps in terms of earnings yield relatively low currently at around 100 bps on a TTM basis (Chart1). However, they have not yet reached the extreme optimism seen during 2017-18 where they traded at a premium to large caps.
On the flip side, earnings growth of mid and small caps is expected to be much ahead of large caps (NIFTY50 index) over FY22-24 which could support their valuations (Table 2).
The higher growth is attributable to the significantly larger impact of covid on mid and small cap space and the imminent opening up of the economy over the next two years which is likely to show higher growth on a depressed base. Mid and small caps have the lion’s share of the most severely impacted sectors due to covid such as hotels, resorts, restaurants, cinema, casino, travel agents, travel bags, air lines, retail stores, capital goods, small banks & NBFCs
Emerging risk - Normalisation of excessive liquidity and expected rate hikes by the US FED will likely reduce the risk appetite of investors, thereby, demanding higher earnings yield spread from mid and small caps over large caps.
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