BSE Midcap and Smallcap showed impressive performance in first-half of 2023; can they sustain the momentum?

Second-rung stocks in the domestic equity market returned with a bang in the first half of 2023 after a lull in 2022. Consider this: While the BSE Midcap and Smallcap indices soared nearly 14 per cent and 13 per cent, respectively, on a year-to-date (YTD) basis till June 30, the benchmark BSE Sensex gained a relatively meagre 6 per cent. The performance is even more impressive when compared with last year, when the BSE Smallcap index plunged 1.80 per cent, while the BSE Midcap and Sensex gained 1.38 per cent and 4.44 per cent, respectively.

Buoyed by the current rally, the BSE Midcap, Smallcap, and Sensex also ended the first half (H1) at fresh record closing highs of 28,776.20, 32,602.14, and 64,718.56, respectively. Market watchers believe the recent outperformance in the broader markets will continue and factors such as formalisation and digitalisation of the economy, lower input costs, improved availability of credit, and expanding valuation multiples will support investor sentiment.

D-Street Stars

Data showed that firms across sectors delivered in H1. With a jump of 66 per cent YTD, Aurobindo Pharma was the top gainer in the mid-cap space, while One97 Communications (Paytm), PB Fintech, KPIT Technologies and Power Finance Corporation surged over 50 per cent. In the large-cap space, ABB India jumped 65 per cent YTD, followed by Cholamandalam Investment and Finance Company (up 58 per cent), Tata Motors (up 53 per cent), Hindustan Aeronautics (up 50 per cent) and ITC (up 36 per cent). However, heavyweights like Reliance Industries (up 0.10 per cent) and IT major Tata Consultancy Services (up 1.27 per cent) saw almost no gains.

Talking about the rally, Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities, says: “Small- and mid-cap segments should continue to do well going forward mainly because input costs have fallen. We have seen a pick-up in demand. Interest rates are close to the peak. As a result of these factors, several stocks from these segments have delivered all-time high sales and profit numbers in the March quarter. This should continue in the coming quarters as well.”

Gaurav Dua, Senior Vice President and Head of Capital Market Strategy at Sharekhan by BNP Paribas, says, “Over the next 12-18 months, we see 10-15 per cent upside at the benchmark levels. [But], the returns could be much better in broader markets.”

Among sectors, capital goods, automotive and real estate have been the star performers so far in 2023. The BSE Capital Goods, Auto and Realty indices have jumped 22.14 per cent, 20.73 per cent, and 20.72 per cent, respectively, on a YTD basis. Meanwhile, the FMCG (fast-moving consumer goods) and Healthcare indices gained 16.27 per cent and 12.07 per cent, respectively.

Speaking about the top performers, Sheth of SAMCO Securities, says, “The government’s increased push towards infrastructure led to a surge in the order books of capital goods players. With this being a pre-election year, [their] order books are bound to swell further. This would ultimately get reflected in their financials.”

Another factor that lifted the mood on Dalal Street was the Reserve Bank of India’s decision to pause the hikes in interest rates as inflation showed signs of moderation. Sheth says this came as a boost to the real estate sector. “The strong business performance by realty companies and record pre-sales numbers led to a rally in the BSE Realty index. The recent project additions will help to continue the uptrend. A rate cut would further improve sentiment and demand… and could keep the momentum in the real estate sector going,” he adds.

Not all sectors gained, though. The BSE Oil & Gas index saw a 10.78 per cent decline YTD, which was the sharpest fall. The BSE Power index swung to an 8.45 per cent decline YTD, compared with a whopping 26 per cent gain last year, when it was the top performer. The BSE Bankex, which gained 21 per cent in 2022, has gained just 3.26 per cent so far in 2023. The BSE Information Technology (IT) index, which plunged 24 per cent last year, has recovered by 4.20 per cent in 2023.

However, the future of the IT sector looks bright, according to Amar Ambani, Head of Institutional Equities at YES Securities, despite the recent underperformance. “There is no doubt about the revenue potential for Indian IT services, so there’s no question of a bet against it. Technology cycles are long-term in nature. Presently, only 30 per cent of the IT workload has transitioned to the Cloud. Then there is the sunrise opportunity from AI (artificial intelligence) or machine learning-based tools. Indian IT companies have strengthened their relationship with hyperscalers, built dedicated teams and engaged in collaborative development. All these are key developments,” he says.

FPIs: Back in action

Another noteworthy aspect was the return of foreign portfolio investors (FPIs). After an outflow of Rs 1.21 lakh crore in 2022, FPIs poured nearly Rs 76,407 crore into domestic equities till June 30.

V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, says, “Globally, Japan continues to attract the biggest inflows, followed by India. Prospects of sectors like financials, automobile and capital goods sectors look good and they are likely to attract more inflows, going forward. However, FPI inflows are likely to moderate, going ahead, due to rising valuations in India.” Japan’s Nikkei index has gained around 25 per cent YTD.

Going ahead, although the entire market is expected to do well, analysts believe some sectors will stand out. Sandeep Raina, Head of Research at Nuvama Professional Clients Group, says, “Sectors like manufacturing (India is destined to be a big manufacturing hub), capex-driven sectors, banking, real estate and hotels are expected to do well. However, choosing the right stocks is of utmost importance as returns can be exceptional.” 

@iamrahuloberoi