Investing.com – The outperformance of Indian mid- and small-caps versus large-caps over the past two years has pushed the valuation gap to an all-time high, UBS said, signaling a possible correction in the short term.
The divergence in performance between the Nifty Midcap 100 and Nifty 50 indices has reached unprecedented levels, largely driven by reratings in FY 2023-24.
“Based on past cycles, we believe an SMID correction is long overdue,” the note said, drawing parallels with the correction seen in 2018-19.
About 80% of the 20 SMID-heavy sectors tracked by UBS, including chemicals, home improvement and exchanges, are trading at or above their three-year average multiples.
UBS says top-down value strategies are challenging in the current environment, but selective bottom-up ideas with strong fundamentals could still offer opportunities.
UBS expects significant growth in Delhivery Ltd (NS:) express and less-than-truckload businesses, helped by market share gains and margin improvements. The stock has a buy rating with a target of Rs 525, translating into a gain of 57%.
Indian Power Exchange Ltd (NS:), which has a Buy rating of Rs 260, implies an upside of 49%. With a 19% year-on-year increase in trading volumes in FY2025 to date, driven by green and real-time markets, UBS believes IEX will benefit from strict renewable energy obligation mechanisms and new product launches.
Buy Multi Commodity Exchange of India Ltd (NS:) rating, with a target of Rs 8,000 offering 35% upside. UBS saw potential growth from increased participation, new product offerings such as weekly options and electricity derivatives. Concerns about a sequential slowdown in growth are considered overblown.
While Navin Fluorine International Ltd (NS:), also rated Buy, has a target of Rs 4,250, about 22% upside. The company’s capacity expansion in specialty fluorochemicals and improved margin prospects due to backward integration are expected to drive revenue growth.
Ramkrishna Forgings Ltd (NS:) has a 66% lead. UBS is optimistic about RKFL’s revenue visibility from rail orders and aluminum forging projects, despite concerns about a cyclical slowdown in the commercial vehicle market.
Shyam Metal and Energy Ltd (NS:) also offers an upside of 53%. UBS highlighted diversification into battery aluminum foil and potential anti-dumping duties on Chinese imports as key factors for the company’s growth.