A rally in mid and smallcap stocks in India this year has surprised many. Every second midcap and smallcap stock has delivered double digit returns; nearly 100 stocks from the BSE Midcap and the BSE Smallcap indices have jumped over 50 per cent, with a dozen among them such as Aurionpro Solutions Ltd, Nucleus Software Exports Ltd, Jindal Saw Ltd, Zen Technologies Ltd, Titagarh Railsystems Ltd and Kaynes Technology India Ltd doubling investor wealth. The strong performance of the second rung stocks in the past two months, analysts said, has raised the prospect of irrational exuberance in the market and reduces the set of stocks with some value further.
Data showed shares of Aurionpro Solutions have climbed 200 per cent to Rs 1,027.50 apiece from Rs 342.65 level at the end of 2022. Nucleus Software Exports surged 171 per cent to Rs 1,044.80 apiece from Rs 384.15 level as on December 31, 2022. Stocks such as Ddev Plastiks Industries, WPIL and Manaksia surged 127-154 per cent during the same period.
Jindal Saw, Waaree Renewable Technologies, Zen Technologies, Titagarh Railsystems, Tanfac Industries, Kaynes Technology India, JBM Auto and Datamatics Global Services are among other smallcap and midcap stocks doubling investor money in 2023 so far.
The BSE Midcap index and the BSE Smallcap index have risen 10 per cent each year-to-date against a 3 per cent rise in the largecap benchmark Sensex during the same period.
In its recent strategy note, Kotak Institutional Equities said it struggles to find value in the market, with many stocks among its favoured sectors such as BFSI, capital goods, healthcare services, real estate having run up sharply in the past 1-2 months, leaving the BFSI sector as the only meaningful sector with value.
Analyst at Kotak Institutional Equities attribute the broad market rally to better domestic macro-economic outlook and improving profitability, led by lower raw material prices. However, the sharp rally in midcap and small cap pockets seem to be bordering on euphoria as consumption demand is still sluggish and valuations have gone to unrealistic levels in most cases, it said.
Mrs. Bectors Food Specialities (up 99.32 per cent), Precision Camshafts (up 92 per cent), Zensar Technologies (88.33 per cent), Cyient (up 84 per cent), Rail Vikas Nigam (up 81 per cent), Kirloskar Brothers (up 80 per cent), PTC Industries (up 79 per cent), Safari Industries (India) (up 78 per cent) and Sonata Software (up 77 per cent) are among midcap and smallcap stocks delivering strong returns this year.
"The multiples of the midcap and smallcap indices have rerated sharply since mid-March as a result of the recent rally , after the derating seen over 2021-22 during the Covid-19 pandemic. The valuation premium of the midcap index over the large-cap index has increased in recent months, although it is yet to reach the lofty differentials seen in the past 12 months. More important, most midcap stocks are trading well above their pre-Covid multiples, which reflects the market's high expectations from the midcap. companies and low concerns about possible disruption to business models," Kotak said.
Joseph K Thomas, Head of Research, Emkay Wealth Management said: "We are at a critical juncture as far as the equity market and investments are concerned, largely we believe that there will be limited implications of international developments on the Indian markets, barring a spike in crude oil prices. In the recent past Indian markets have shown little to no implications of the movements in the US equities. We expect a lower double-digit growth for the Indian market in FY24 provided there are no major negative surprises."
Emkay, however, still believes that select smallcap and midcap stocks can outperform as the valuation gap with larger peers closes. It prefers structural growth companies over cyclical ones, as the peak of the commodity cycle is behind us.
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