Nifty Midcap 150 Churn Limits Historical Valuation Comparisons, Says Kotak

⚡ Key Financial Takeaways

Only 46 stocks were consistent members of the Nifty Midcap 150 between FY2022 and 1HFY27, while 275 unique stocks appeared in the index during FY2022-26.

The index's mechanical construction based on full-float market capitalisation leads to frequent entry and exit of stocks, altering its composition rapidly.

Top three sectors accounted for between 34% and 152% of the index's returns in positive half-year periods, with sector leadership changing frequently.

A small number of stocks (1 to 27) often contributed more than 50% of the index's performance in any given half-year, many of which later exited the index.

41 former mid-cap stocks moved to the Nifty 50 or Nifty Next 50, while 129 moved to the Nifty Smallcap 250 or were delisted from indices.

💡 Why It Matters

For investors, this analysis highlights a critical flaw in using historical index data for mid-cap investing. The high churn rate means that the "Nifty Midcap 150" of today is fundamentally different from the index of two or three years ago. Relying on past valuation multiples or earnings growth rates of the index as a whole may lead to misleading conclusions, as the underlying companies driving those metrics have largely changed. Investors need to focus on current constituent analysis rather than historical index trends.

High Turnover in Nifty Midcap 150

The Nifty Midcap 150 has experienced significant changes in its constituent stocks over the past four years, according to a recent note by Kotak Institutional Equities. This high level of churn means the index is a "moving target," which limits the utility of historical earnings and valuation comparisons for investment decisions.

Sanjeev Prasad, from Kotak Institutional Equities, highlighted that only 46 stocks have been part of the Nifty Midcap 150 consistently between Financial Year 2022 (FY2022) and the first half of Financial Year 2027 (1HFY27). In contrast, 275 unique stocks were included in the index during the period from FY2022 to FY2026.

Mechanical Construction Drives Changes

The frequent changes in the index are a direct result of its mechanical construction. The Nifty Midcap 150 is composed of the 150 stocks ranked by full-float market capitalisation. As stock prices and market capitalisations fluctuate, companies naturally enter and exit the index, leading to a constantly evolving composition.

Kotak noted that this dynamic makes comparisons such as future earnings growth against historical growth, or current valuation multiples against historical multiples, less meaningful. The changing composition also implies that the index's performance and earnings can be heavily influenced by a handful of sectors at different points in the market cycle.

Sector and Stock Concentration

The brokerage's analysis showed that sector leadership within the index is unstable. In the six positive-return periods among the 10 half-year periods from 1HFY22 to 2HFY26, the top three sectors accounted for between 34% and 152% of the Nifty Midcap 150's returns. The sectors occupying the top three positions by weight changed frequently, with seven different sectors featuring among the top three across these 10 half-year periods.

Furthermore, the index's restrictive size means that several stocks from a popular sector can enter the index together when investor sentiment turns favourable, while sectors that are out of favour can become under-represented.

A small number of stocks often accounted for a large share of the index's movement. Between one and 27 stocks contributed more than 50% of the Nifty Midcap 150's performance in any half-year period between 1HFY22 and 2HFY26. Several of these major contributors subsequently ceased to be part of the index.

Impact on Index Performance

The analysis also tracked the movement of stocks between indices. Forty-one erstwhile mid-cap stocks moved into the Nifty 50 or Nifty Next 50, while 129 stocks either moved into the Nifty Smallcap 250 or were no longer part of an index.

As a result, Kotak noted that mid-cap index performance can often reflect the latest market narrative or theme, with the stocks and sectors driving returns changing considerably over time. This suggests that investors should be cautious when relying on historical index data for forward-looking investment strategies.

🏛️ Background & Context

The Nifty Midcap 150 is a widely tracked benchmark in India, representing mid-capitalisation companies. Its construction is rule-based, relying on market capitalisation rankings, which inherently leads to turnover as market conditions change. This analysis by Kotak Institutional Equities provides a quantitative look at the extent of this turnover over a four-year period, offering a data-driven perspective on the index's volatility in composition.

👁️ What To Watch Next

Investors should monitor the current composition of the Nifty Midcap 150 and the sectors currently driving its performance. Given the high churn, it is important to regularly review the index's constituents to ensure that investment strategies are aligned with the current market narrative rather than historical trends. Additionally, tracking the movement of stocks between the Nifty 50, Nifty Next 50, Nifty Midcap 150, and Nifty Smallcap 250 can provide insights into market sentiment and sector rotation.