Nippon India Growth Mid Cap Fund, managed by Rupesh Patel, has delivered a robust 22% return over the past five years, outperforming its benchmark. Despite concerns about an overheated midcap market, Patel identifies opportunities through a Growth at Reasonable Price (GARP) strategy, focusing on stocks with attractive risk-reward profiles.
The NSE Midcap 150 index has remained flat since September 2024, even as earnings have grown, leading to a valuation correction. Patel emphasizes a bottom-up approach to portfolio construction, targeting businesses with long-term earnings growth potential despite near-term expense appearances. The fund is overweight on financials due to the financialization of savings and underweight on technology due to geopolitical uncertainties and AI disruptions.
Midcap financials, particularly well-capitalized lenders, are favored for their healthy returns and reasonable valuations. In contrast, midcap IT companies face earnings growth risks but may become attractive as they adapt to new realities. The Q4 earnings season has shown resilience in midcaps, but macroeconomic risks and geopolitical uncertainties remain concerns.
“Our OW stance on financials is on account of our exposure to lenders as well as other beneficiaries of financialization of savings like Life Insurance companies, asset management companies, Exchanges, etc.”
Rupesh Patel, Senior Fund Manager - Equity Investments, Nippon India Mutual Fund
Patel believes midcap companies are in a sweet spot, with resilient earnings and diverse growth opportunities. The fund is positive on financials, consumer discretionary, and select industrials, driven by favorable demographics, income growth, and government initiatives in manufacturing.
Despite the midcap index reaching a new peak, its flat returns over 20 months reflect a time correction in valuations. Superior earnings growth in midcaps compared to broader markets suggests a healthy outlook for future performance.
Background
Midcap stocks have been a focal point in the Indian market, often seen as a barometer for economic health and investor sentiment. The recent performance of the midcap index, despite reaching new peaks, indicates a complex interplay of earnings growth and valuation corrections.
Looking ahead, investors should monitor geopolitical developments and macroeconomic conditions that could impact midcap valuations and earnings growth. Patel's strategy focuses on maintaining awareness of valuations and avoiding vulnerable businesses.
