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Midcap stocks Hero MotoCorp, Zydus Lifesciences, JSW Energy, NHPC, Bharat Heavy Electricals, Bosch, and Samvardhana Motherson are expected to earn upgrades.
Companies with market capitalisation (mcap) as high as Rs 80,000 crore (Rs 800 billion) are unlikely to find a place in the mutual fund largecap universe during the June-end reclassification as stock prices have zoomed across the board in the last six months.
The mcap cutoff to enter the largecap list, which stood at Rs 67,024 crore (Rs 670.24 billion) during the December-end rejig, is expected to be around Rs 83,000 crore (Rs 830 billion) this time, according to an analysis by domestic institutional brokerage house Nuvama Alternative and Quantitative Research.
The cutoff has gone up sharply since the COVID-19 pandemic. During July-December 2019, the largecap cutoff stood at Rs 27,454 crore (Rs 274.54 billion).
The midcap cutoff has grown more than threefold from Rs 8,801 crore (Rs 88.01 billion) to Rs 27,700 crore (Rs 277 billion) in the same period.
The sharp surge in mcap threshold has led to calls for a change in stock classification methodology, or increasing the number of largecap and midcap stocks.
The mutual fund industry has suggested tweaks to the process in discussions with the Securities and Exchange Board of India.
The Association of Mutual Funds in India (Amfi) revises the list of largecap, midcap, and smallcap stocks at the start of January and July every year based on the previous six-month performance of stocks.
The top 100 companies based on the average mcap in the past six months qualify as largecaps, the next 150 become midcaps, and the rest smallcaps.
According to MF officials, expanding the largecap universe to the top 120 to 130 stocks, and a similar increase in the midcap basket will allow largecap and midcap fund managers greater legroom to outperform the benchmark.
Given that Amfi uses the average mcap of the previous six months to prepare the list, the cutoffs will be in line with expectations, except for a sharp change in the market direction in the next two weeks.
In the upcoming reclassification, the largecap investment universe is expected to see seven changes.
According to a report by IIFL Securities, midcap stocks Hero MotoCorp, Zydus Lifesciences, JSW Energy, NHPC, Bharat Heavy Electricals, Bosch, and Samvardhana Motherson are expected to earn upgrades.
Those expected to move out are ICICI Prudential Life Insurance, ICICI Lombard General Insurance, Polycab India, SRF, Marico, SBI Cards, and Berger Paints India.
The largecap index Nifty50 is up 8 per cent so far in 2024. The Nifty Midcap 150 and Nifty Smallcap 250 have risen around 20 per cent each.
In the past three years, the midcap and smallcap indices have more than doubled, while Nifty50 is up 50 per cent.
Feature Presentation: Ashish Narsale/Rediff.com
