Economic figures for India clearly are pointing to a slowdown. In such a scenario how does it impact the stock market? At an aggregate level, it is common knowledge that large caps handle battering far better than mid-caps and small caps.
Page 17 of Times of India, 6 August 2012, Monday, has an article that gives data that proves the same.
|Revenue growth in % (YoY)||20.4||13.3||10.3|
|EBITDA growth in % (YoY)||8.1||2.6||-6.4|
|PAT growth in & (YoY)||14.5||-5.6||-57.5|
Source: Times of India
P/E multiples for BSE30, BSE Mid-cap and BSE Small cap indices
We see an interesting pattern not seen in the recent years. The small cap index is on steroids and has overtaken the BSE30 and BSE Mid-cap indices respectively in the last few months. As on 1 Aug 2012, the BSE Small cap index had a trailing P/E of 20.6, BSE Mid-cap index had a trailing P/E of 19.2 and the Sensex is at a comparatively sedate P/E of 16.6
Financial data is not good right now for small cap companies as a whole. Prices eventually follow earnings. Its clear that there’s something quite funny brewing in small caps. Mid-caps are bucking the earning trend too.
I think it calls for treading cautiously in mid-caps and small caps right now. The usual applies. I am not saying you cannot find gems in mid-caps and small caps. But there’s froth for sure.
What is your view on this divergence between prices and earnings? Do share your thoughts in the comment box below.
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Please read the disclaimer and make wise investing decisions.
Times of India has classified companies on the basis of market capitalization as following:
Large: > Rs. 20,000 cr
Mid-cap: Rs. 2,500 cr < 20,000 cr
Small cap: < Rs. 2,500 cr