Shares of smallcap companies were in focus on Monday with the S&P BSE Smallcap index recording its sharpest intra-day rally in over five months, after the market regulator the Securities and Exchange Board of India (Sebi) tweaked rules for multi-cap mutual funds.
At 10:20 am; the S&P BSE Smallcap index was up 3.7 per cent at 14,917 points, as compared to 1.7 per cent rise in the S&P BSE Midcap index and 0.75 per cent gain in the benchmark S&P BSE Sensex. The smallcap index has reported its sharpest intra-day gain since April 7, 2020, when it rose 4.3 per cent on the BSE. It hit a 52-week high of 15,132 on August 28, 2020 in intra-day trade.
The development, analysts say, has given a fresh trigger to the mid-and small-caps that can see some uptick in the days ahead. That said, they do suggest investors must look for earnings visibility and balance-sheet strength before taking an investment call in this market segment.
“Initially, given the radical rejig, potentially the entire smallcap universe may see a sharp rally,” said Aditya Narain, head of research for institutional equities at Edelweiss Securities.
Among individual stocks, Multi Commodity Exchange of India, Syngene International, City Union Bank, Galaxy Surfactants, APL Apollo Tubes, Astrazencea Pharma India, Kajaria Ceramics and Blue Star from the S&P BSE Smallcap index rallied over 10 per cent. Total 34 stocks from the smallcap index hit their respective 52-week highs on Monday. The list includes Tata Elxsi, Strides Pharma Science, Ramco Systems, Adani Green Energy, Firstsource Solutions, Indo Count Industries, Laurus Labs and Mastek.
“New investors have been largely chasing the small-and mid-cap stocks. Their aggression would aggravate now, partly due to this restructuring, which favors these two market segments. While mutual funds may buy quality small-and mid-cap stocks with adequate liquidity, many new investors may end up buying stocks that are in bubble zone in terms of valuation or penny stocks, which are not backed by durable businesses or fundamentals. In the next one to two months, small-and midcap stocks may continue to outperform their large-cap peers,” says G Chokkalingam, founder and chief investment officer (CIO) at Equinomics Research.
Those at Morgan Stanley, too, had backed the mid-and small-cap segments in their recent note on attractive valuation, which they believe, could see a number of stocks from these segments get rerated over the next few months.
Small-and mid-caps, Morgan Stanley said, went into a prolonged phase of underperformance after peaking in early January 2018 and tanked a massive 40 per cent relative to the BSE Sensex between 2017-end and March 2020. Stretched valuations (SMIDs were trading at 50x trailing earnings in 2017-end, over twice the multiple for S&P BSE Sensex), growth deceleration in the backdrop of policy measures such as implementation of goods and services tax (GST) and demonetisation, Morgan Stanley said, were among the key reasons for the underperformance of the these two market segments since then.
“With monetary aggregates normalising and significant policy action underway with a corporate tax cut last September, we think growth is set to turn. Smaller firms are likely to benefit more due to their operating and financial leverage. Small, midcap valuations are looking attractive relative to gross domestic product (GDP) and money supply, setting the stage for outperformance versus large cap stocks in the coming months,” wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in an August 18 co-authored note with Sheela Rathi.