Since August 1, while the Sensex has fallen around 900 points the combined market capitalisation of all BSE-listed companies has gone up by over Rs 8 lakh crore. In the last one month, while the Nifty50 has been flat, the Nifty Smallcap50 has shot up 9.4% while the Nifty Microcap 250 has become 11% stronger.
If you dig deeper into the bottom pile of stocks, shares of SME counter Sungarner Energies charmed the bulls by more than tripling investors’ wealth last week on listing day itself.
Analysts attribute this strong divergence of performance between two pockets of the market to a combination of solid corporate earnings and active participation of both local and institutional investors in the India growth story which goes well beyond bluechips.
“If we look at the Q1 earnings print of mid and smallcaps, they have been largely in line or in some cases even exceeded the consensus expectations. Further, we have seen many small and midcap companies meeting fund managers which too hints at rising investor interest in broader markets,” Raj Vyas, VP of Research, Tejimandi.
An analysis by StoxBox shows that the top 250-1,000 companies according to market capitalization have been lagging in market cap growth by at least 30% vis-à-vis profitability when we compare their performance in FY23 over FY19.
“This clearly shows that there is still steam left in these companies even if we assign the same multiple of FY19 to their earnings today. However, we advise investors with a high-risk appetite and long-term perspective to venture into these companies due to liquidity constraints on the exchange platform and smaller scale of operations of these companies,” said Manish Chowdhury, Head of Research, StoxBox.At a broader level, smallcap and microcaps as a segment were either declining or stagnant during 2010-2019. “I see this growth as sustainable but with some caution. Players with good fundamentals will continue to benefit,” smallcase manager Narender Singh said, adding that fintech, micro NBFCs, railway-related industries and two-wheeler EV stocks could lead the pack.
The list of top winners in the broader market includes those in shipbuilding (Mazgaon Dockyard, Cochin Shipyard), electric bus players JBM Auto, Olectra Greentech, electrical capital good companies like Polycab, HPL, Genus Power, Servoteach, etc.
Are these signs of a bubble building up in smallcap stocks?
While the outlook for earnings growth given the domestic growth prospects remains positive, one must also keep valuations in check because many pockets of the market are not cheap any more and overpaying will leave little margin of safety.
“No one really knows when the momentum will end but for now it clearly shows that there is internal strength in the market supported by improving macroeconomic activities,” Vyas said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)