Investing.com — India’s mid-cap and small-cap outperformance against large-caps over the past two years has a valuation gap at a historical high, UBS said, signaling a potential near-term correction.

The performance divergence between the Nifty Midcap 100 and the Nifty 50 indices has reached unprecedented levels, driven largely by re-ratings in fiscal 2023-24.

“Based on past cycles we believe an SMID correction is long overdue,” the note said, drawing parallels with the correction seen in 2018-19.

About 80% of the 20 SMID-heavy sectors tracked by UBS, including chemicals, home improvement, and exchanges, are trading at or above their three-year average multiple.

UBS says that top-down value strategies are challenging in the current environment, but selected bottom-up ideas with strong fundamentals can still provide opportunities.

UBS expects significant growth in Delhivery Ltd’s (NS:) express and part truck load businesses, aided by market share gains and margin improvement. The stock is rated buy with a target of 525 rupees, which translates to an upside of 57%

Indian Energy Exchange Ltd (NS:) rated buy with 260 rupees, implying an increase of 49%. With a 19% YoY increase in trading volumes in fiscal 2025 to date, driven by real-time and green markets, UBS sees IEX benefiting from strict liability mechanisms that have evolved and new product launches.

Buy rated Multi Commodity Exchange of India Ltd (NS :)), with an 8,000 rupee target offers 35% upside. UBS noted potential growth from increased participation, new product offerings such as weekly options, and electricity derivatives. Concerns about sequential growth deceleration are seen as overstated.

while Navin Fluorine International Ltd (NS:), also rated buy has a target of 4,250 rupees, about 22% upside. The company’s capacity expansion in specialty fluorochemicals and improved margin prospects from backward integration are expected to drive revenue growth.

Ramkrishna Forgings Ltd (NS:) has an upside of 66%. UBS is optimistic about RKFL’s revenue generation from rail orders and aluminum forging projects, despite concerns about a cyclical slowdown in the commercial vehicle market.

Shyam Metalics and Energy Ltd (NS:) also offers an upside of 53%. UBS noted the diversification of aluminum foil battery levels and potential anti-dumping duties on Chinese imports as the main drivers of the company’s growth.