Buy mid, small-caps selectively, say analysts

After a sharp outperformance in the mid-and small-cap segments in the first half of calendar year 2023 (H1-CY23), analysts are now turning cautious on these two market segments and suggest investors stay selective and look for valuation comfort and earnings visibility before investing.

The S&P BSE Midcap index has surged 13.7 per cent in H1-CY23, and the S&P BSE Small-cap index gained 12.7 per cent during this period, data shows.

The S&P BSE Sensex, in comparison, has moved up 6.4 per cent.

Retail investors, according to G Chokkalingam, managing director for research at Equinomics Research & Advisory, have been bullish on mid-and small-caps, which is their favourite go-to destination when it comes to investing in the markets.

As a result, the stock prices have inched up.

“That apart, stable macro-economy and the overall positive sentiment has seen the frontline indices, too, scale new heights.

“Valuations of all three segments – small, mid-and large-caps are no longer attractive.

“Especially the small-caps now appear stretched valuation-wise as the small-cap index has almost doubled in the last three years. Small-caps appear more risky at this juncture.

“Moreover, history suggests that once in three years, small-caps correct very badly due to relative valuation compared to large-caps and general profit booking by smart investors,” he said.

The sharp run in the mid-and small-caps in H1-CY23, was also partly due to the underperformance of these two segments in calendar year 2022 (CY22).

While the S&P BSE Midcap index ended CY22 with a modest gain of 1.4 per cent at 25,314 levels, the S&P Smallcap index lost 1.8 per cent to 28,926 levels during this period, data shows.

The S&P BSE Sensex gained 4.4 per cent during this period and ended CY22 at 60,840 levels.

Another reason for the recent rally in the mid-and small-caps, according to Nischal Maheshwari, chief executive officer for institutional equities at Centrum Broking, are the flows into these two segments.

“The FII and domestic mutual fund flows (into equities and the mid, smallcap segments) have been strong and have bought into these two market segments.

“The economy, too, is doing well and India is a good place to be at the moment.

“All these things are driving the rally in the mid, smallcaps.

“Historically, too, we have seen these two segments do well fundamentally when the overall economy does well,” he said.

Meanwhile, Nucleus Software Exports, JBM Auto, Aurionpro Solutions, Jindal Saw, Titagarh Railsystems, Patel Engineering and Jay Bharat Maruti from the mid-and small-cap universe have seen a stellar run in H1-CY22 and have doubled investors’ money during this period, ACE Equity data shows.

SVP Global Textiles, Music Broadcast Ltd., Zee Media Corporation, Insecticides (India), Future Consumer, Gland Pharma and Barbeque-Nation Hospitality have been among the worst performers in H1-CY23 that have slipped up to 63 per cent.

Gaurang Shah, senior vice-president at Geojit Financial, too, remains cautious on these two segments, especially the small-caps, given the sharp run up seen in them in the last few months.

“Mid, small-caps will inch up as the earnings are likely to support the rally.

“However, one needs to be extremely careful and adopt a stock & sector specific approach regarding these two segments.

“One cannot bet on anything and everything to make money. Autos, metals, fast moving consumer goods (FMCG), information technology (IT), banking, non-bank financial services (NBFC), cement and healthcare-related sectors offer tremendous value, but one needs to be stock specific.

“Remain extremely careful, more so in the small-cap universe,” he said.

From an overall market perspective, too, analysts are now cautious after the sharp rally seen in the past few weeks that has taken the S&P BSE Sensex above the 65,000-mark and the Nifty 50 above the 19,300 levels.

The immediate trigger for the markets, they believe, will be dependent on corporate earnings, progress of monsoon, central bank policy action, among other factors.