印度策略：升级中型股-重新审视中小盘股机会

After being cautious on SMIDs for a year, given our view of macro-earnings risks andvaluations, we are now upgrading Mid Caps within SMID to Neutral, with room for someoutperformance in the near term. We also present our approach to our SMID portfolio.SMIDs have underperformed: SMIDs represent about 400+stocks with an aggregatemarket cap of over $1.5 trillion. They’ve been in a bubble zone for a while—a point we’venever hesitated stating. 2025 kicked off with a dramatic correction: midcaps and smallcapsplunged 16% and 22% respectively in just two months. With earnings season wrapped up,we take a fresh look at our SMID thesis.Costly, but the froth is off: Mid-caps have scaled down from a 70% premium to thelargecaps to 35%. The 35% premium is around the five-year average, which itself hasmoved up from 19%, 3 years back. The reality is this: the SMID bubbles have let go of a lotof froth, and are broadly valued in line with recent history. Not cheap, and not exorbitant.The distinction within the SMIDs: While we see better valuation prospects in the midcapspace, smallcaps look different, where valuations have continued to inch up courtesyearnings downgrades, and near-term growth does not seem as robust. Midcaps also seemto have garnered momentum: till December last year, they were looking at single digitearnings growth for FY25, and a downgrade frenzy followed. Q3 and Q4 saw c30% growth,culminating in a robust 21% FY25 growth reported so far. This momentum with favorablemacro drivers in H2 makes us more positive on Midcaps within the SMIDsReturn of earnings support?One of the standout themes of Q4 has been stockoutperformance vis-a-vis lowered estimates—a trend pronounced in midcaps, with 51%companies beating expectations, the highest since 2020. On average, earnings havecome in 10% above consensus for two consecutive quarters. The last time it happenedin March 2023, it sparked a notable rally. While it remains to be seen if history repeatsitself, the downward revision cycle appears to have paused. Even May, typically a month ofheavy estimate changes, saw earnings hold steady—a welcome shift after eight months ofdowngrades. Near term support is now visible.Upgrade Midcaps: Approach to Portfolio.Current valuations for Midcap-150 are at 28xFY26 earnings from 39x FY25 in Sep. 2024, reflecting the ongoing reset. With marginsstabilizing and macro tailwinds, we believe it’s prudent to shift from a negative to a neutral—or mildly positive—stance on midcaps. While not yet screaming buys, we see someare beginning to present opportunities. Resilient domestic flows will also support. Lastyear, we launched our SMID portfolio with a diversified approach, including allocations tothe Bernstein India portfolio and fixed income, and exited this year, achieving returns of29% (and 103% for SMID stocks alone), outperforming indices. Factoring in liquidatedfunds invested in fixed income, our portfolio has delivered c37% returns since inception,reinforcing our confidence to consider re-initiating our SMID portfolio later this year. Ourcurrent approach is to wait for broader opportunities to emerge to enable us to build alarger portfolio. Our approach would be not sector specific (sector selection is less criticalin SMIDs due to wide performance dispersion) but bottom-up to assess stocks with highearnings growth and positive revisions. See sample screener in appendix.www.bernsteinresearch.com DETAILSWith us approaching the business end of the Q4 earnings season, it’s time to take stock of the SMID situation. The midcap spacehasn’t been in news for the best of reasons, as the returns have been poor relative to what we’ve been used to (8% in FY2025compared to 56% in FY2024 for the Midcap 150 index). Our SMID portfolio, that we discontinued at the beginning of this yeargenerated c29% returns against the 21.5% for midcap index in CY2024. We moved to full cash as the stocks were plagued by avaluation bubble and saw steep fall since September last year. Now, with the earnings almost done, we think it’s worth having arelook at SMIDs. Our observations follow.SMIDS: USUAL CHAMPIONS IN ACCELERATING ECONOMYSMIDs have usually been far extreme versions of their NSE100 counterparts, outperforming in some years and underperformingin others to a wide degree. Usually, we see SMID outperformance more in years with high GDP growth, as we saw in years2004-07, and then in 2012, 2021 and 2023. Average midcap index returns in years with over 16% nominal GDP growth is28.2%, while the average in years with less than 10% nominal GDP growth is 16%. Considering an economic recovery to playout in the second half of this year, a SMID recovery is not completely out of the question.EXHIBIT 1:Yearwise returns of NSE100 (large caps), Midcap150 and Smallcap 250 indices-30%-20%-10%0%10%20%30%40%50%60%70%All years denote calendar years from Jan-Dec. GDP growth figures have been accordingly adjusted to compare the June, Sep and Dec quarters across years, makingit a like-