Market Correction: Large Caps And Mid Caps — Where Do The Opportunities Lie?

Amid the ongoing market rout, large-cap stocks—excluding PSUs and private banks—are trading at higher valuations than mid and small-caps, contrary to popular market perception, asserts Samit Vartak, founding partner and chief investment officer of SageOne Investment Managers LLP.

The ongoing fall in Indian equities presents a unique opportunity for investors, as per the market veteran. He likens the current downturn to "the great Indian clearance sale", emphasising that stock pickers should capitalise on market mispricing.

According to the market expert, large caps should not be viewed as a single entity, but rather divided into three distinct segments — public sector undertakings, private banks, and the rest of the large-cap universe. "When they say large caps trade at 19 times earnings, it’s because of the mix. PSU stocks trade at 8-10 times, private banks at 15-17 times, while the rest trade at 40-plus times," he explained.

On the other hand, the mid-and small-cap space lacks significant PSU and private banking representation, he said. Majority of the mid- and small-cap bucket is trading at 30-32 times earnings, versus 40-plus for the large-cap. “That’s the real comparison," Varthak said.

The benchmark NSE Nifty 50 and the BSE Sensex have fallen 15.8% and 15%, respectively, from the previous peak, triggering the worst fall since 2020. In the broader market, the Nifty Mid-cap 150 has fallen by 21.4%, while the Nifty Small-cap 250 is down 26.8%.

Nifty 50 is trading at a price-to-earnings of 20.7 times, while the mid and small-cap index is trading at 32.5 and 23.9 times, respectively.

Market corrections typically last between six to nine months, and the faster the correction, the shorter its duration, according to Varthak. "We will never get such a big sale unless there are warning signs near us. Weak hands can’t withstand such warnings, but strong hands can endure the bombardment of pessimism," he remarked.

From a long-term perspective, the CIO remains optimistic. "If you are a stock-picker, you don’t need the whole universe to become cheap. There are exciting opportunities after a long time. It will be shocking if one cannot make above-average returns over the next three to four years."