Small-, mid-caps rally may have steam left
NEW DELHI : Small- and mid-cap stocks have roared back thanks to better corporate performance and attractive valuations, with their respective sectoral indices touching new records last week. What’s more, analysts expect these stocks to maintain their momentum as well.
The broader indices too are nearing all-time highs. However, while the S&P BSE MidCap and SmallCap saw gains of 11% and 11.7% during the last three months and 5.42% and 6.98%, respectively, last month, the three-month returns of the Sensex stood at 4.7% and one-month returns at 1.4%. “In the last six months, we have witnessed significant outperformance by mid- and small-cap indices compared to large-cap stocks, leading to a catch-up of multiples for the small- and mid-cap stocks after a period of relative underperformance in 2022,” said Nishit Master, portfolio manager, Axis Securities PMS.
Sushant Bhansali, chief executive, Ambit Asset Management, said: “Over the last few months, mid- and small-caps have been outperforming large-caps, and we would expect this to continue largely due to the valuation discount that had set in over the last couple of years.”
Growth prospects of these companies have helped as well. Investments from retail investors and foreign funds too have remained strong, supporting the rally.
“The performance of mid- and small-cap Q4 (March quarter) results generally aligns with expectations, exhibiting a mix of successes and disappointments. The rebound in retail investor inflows, following a period of heavy selling from December 2022 to March 2023, has provided support for the performance of mid- and small-cap stocks,” said Vinod Nair, head of research at Geojit Financial Services.
Analysts anticipate these inflows to persist due to the moderation in raw material prices and valuations. The domestic demand scenario has surpassed the initial projections of the fourth quarter, and the outlook for margins has improved due to a decline in operational costs, experts said.
The decline in raw material costs supported earnings in Q4, and the moderation in costs has also boosted the forward earnings outlook of the companies, said analysts.
Although the overall outlook for this category is encouraging, it is important to exercise stock-specific analysis as broad valuations remain above long-term averages, said Nair. He said small-caps present a more attractive opportunity as their valuations trade at a discount compared to long-term averages.
“In the mid-cap space, sectors that have done very well and hold promises include the hospitality sector, luggage space, publishing business and aviation sector,” said Jinesh Joshi, senior analyst at Prabhudas Lilladher.
Companies in these verticals have performed well. The hospitality sector has steadily gained after covid curbs were eased and the economy reopened.
Recent big sports events such as the Indian Premier League (IPL) have provided a strong boost to the companies in the space, said Joshi. Luggage manufacturers have seen significant improvement in their operating performance and margin profiles, helped by easing raw material costs, and the trend is likely to sustain, added Joshi.
Companies in the publishing space have seen good traction in their stock prices, helped by improved operating performance, and with children going back to school, performance is likely to continue improving. The aviation sector remains in the limelight as travel activities surge during the first quarter of fiscal year 2023-24 and demand-supply matrix remains favourable.
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Updated: 11 Jun 2023, 11:30 PM IST
