Smallcap stocks led the broad-market selloff as the recently breather rally finally ended on Wednesday. Kotak Institutional Equities said the revival in ‘narrative’ stocks largely drive the recent rally in mid- and small-cap indices. The domestic brokerage said it still does not find value in most parts of the market and noted that earnings have seen further downgrades in the past fortnight.
Kotak called stocks such as Bharat Dynamics Ltd (BDL), BHEL, CG Power, Cochin Shipyard Ltd, HUDCO, HPCL, Ircon International Ltd in the 'narrative' list. Others in the list included Suzlon Energy, NLC India, MRPL and Ircon International.
Kotak data showed BDL is up 29 per cent in the past one month. Mazagon Dock has gained 23 per cent, MRPL 23 per cent, NLC India 18 per cent, JSW Energy 19 per cent, HPCL 17 per cent and Cochin Shipyard 12 per cent.
Kotak said ‘narrative’ stocks saw a revival following the sharp correction in their stock prices in the previous 6-9 months and were one of the key contributors to the rebound in midcap and smallcap. indices.
"We have long struggled with the disconnect between the market caps and the fundamentals of the ‘narrative’ companies. As an example, IRFC trades at 3 times FY2026E BV and 25 times FY2026E EPS (extrapolating recent quarterly results), while BOB, Canara Bank, PNB and Union Bank trade at 0.8-0.9 times FY2026E BV and 5-7 times FY2026E EPS," Kotak said.
Kotak Institutional Equities said the rally of the past fortnight seems to be an odd mix of fundamentals and sentiment. Kotak said it can only speculate the reasons for this odd rally. It said investors may have found value in BFSI stocks, while some may have rediscovered value in ‘narrative’ stocks. Others may have taken solace from reducing FPI selling in the past month and inflows in the past week. Besides, FPIs may have returned to EMs with the ‘Trump’ trade disappointing, it suggested.
"We still do not have a midcap. portfolio, as we do not find much value in most parts of the midcap space other than the BFSI sector," it said.