Midcap valuation discount over large caps in terms of earnings yield spread is low currently at around 10 bps on a TTM basis and offers little ‘margin of safety’ (Chart 1). However, they have not yet reached the extreme optimism seen during 2017-18 where they traded at a premium to large caps.
Q3FY23 was a revival quarter for smaller companies under our coverage with APL Apollo, Jindal Stainless and NALCO faring relatively better. Key highlights: 1) EBITDA/te for ferrous companies was up Rs3,000 on an average; 2) reduced cost of both thermal and coking coal aided margins; 3) net debt/EBITDA rose for almost all the companies; and 4) street raised the valuation multiples of all the companies.