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UBS Continues To Remain 'Selective' On Midcaps

SMIDs as an asset class have had a sharp run-up following demonetisation (Representational image)
SMIDs as an asset class have had a sharp run-up following demonetisation (Representational image)

Global brokerage UBS will host top management from 38 small and mid-cap (SMID) companies (some that are covered by UBS) to meet with investors in Mumbai on 8-9 June 2017. SMIDs as an asset class have had a sharp run-up following demonetisation and the valuation gap compared with large caps is still high, even after a recent correction over the past month. This gap continued to increase based on hopes of growth acceleration and continued inflow from domestic mutual funds. Over the past few months, UBS has downgraded some ratings, as it did not find comfort at their valuations, despite being positive on their business models and long-term growth outlook.

"We continue to be selective' on midcap stocks," say Gautam Chhaochharia, head of India Research at UBS Securities India, and Shaleen Kumar, analyst at UBS Securities India, in a note.

Here are their views:

'We Stick To A Bottom-Up Approach'

Indian SMIDs as an asset class may not be that exciting after their sharp run-up, especially in the near term; we continue to advocate a bottom-up approach. We look for companies with strong business models and quality management, coupled with strong growth potential. We continue to test for earnings scenarios and compare with current Street forecasts to identify earnings surprise potential that is not priced in. We also evaluate potential valuation discounts vs. peers backed by business turnarounds. In our view, markets will be tracking GST disruption, if any, banking NPL resolutions, housing development progress, monsoon progress and growth recovery signals.