After a year in which they delivered a performance of 26.38 per cent, Indian mid-cap stocks offer competitive valuations and the opportunity for investors to participate in some of the Asian giant’s fastest growing sectors, says asset manager Kotak Mahindra (UK).

Overall, the Indian stockmarket had a good 2010: the CNX Nifty, composed of 50 of the largest and most liquid stocks found on the National Stock Exchange of India, returned 18.16 per cent. In comparison, the CNX Mid-cap index returned 26.38 per cent for the 12 months ending November 2010.

However, last year was a good one generally for global stockmarkets. In the US, the S&P 500, a gauge of the large-cap equity market, delivered an annualised total return of 15.06 per cent, and the S&P MidCap 400, a benchmark for US mid-sized listed firms, delivered 26.64 per cent.

In terms of valuations, the price/earnings ratio of Indian mid-cap stocks lags those of the large-caps. According to Kotak, the 12 month forward price/earnings ratio of the Bombay Stock Exchange mid-caps stands at 13.8, as compared to 15.2 for the large caps, and 17.3 for the Sensex, a broad barometer of the Indian stockmarket.

Looking in more detail at particular sectors demonstrates the potential for growth, says Kotak Mahindra; in the financial services industry insurance penetration in the country is at just 5 per cent, while retail loans account for only 10 per cent of GDP.

“These numbers leave significant room for expansion through both width and depth of penetration. To join the dots, most of the intermediaries present in this space and standing to benefit from the potential increase in penetration are mid-caps,” says Kotak.

The media industry provides another example, says the asset manager, citing a PwC-FICCI 2008 report which says revenues in this sector are expected to double to $25 billion by 2012. Again, the firm says many of the beneficiaries of this growth are in the mid-cap space.

One argument against investing in these assets has traditionally been the presence of volatility, but Kotak Mahindra (UK) says that a recent analysis it carried out shows this is only the case in the short term.

“If one expands the view to medium term and long term, mid-cap volatility is at par with that of the large caps,” the firm says.

However, the nature of the mid-cap universe means it is better suited to a stock picking approach, says Kotak, and it expects this investment style to outperform in this space going forwards.