Action shifts to mid, small-caps. Analysts see more upside in select stocks

After the stupendous rally that saw the S&P BSE Sensex cross the 60,000 mark on September 24, the action seems to have shifted to the mid-and small-cap segments. At a time when the markets navigated through an uncertain phase of rising oil prices, plans of liquidity taper by the US Federal Reserve (US Fed) and developments in China, S&P BSE Sensex slipped over 1 per cent. The mid-and small-cap indices on the BSE, on the other hand, moved up over 2 per cent and 1 per cent, respectively during this period.

Gains in some of the individual stocks in the mid-and small-cap space have been sharper. India Glycols, Patel Engineering, Brightcom, Godfrey Phillips India, Tejas Networks and IDBI Bank have surged 24 per cent to 47 per cent during this period, ACE Equity data show.

According to historical data, when the markets recover, the mid-cap and small-cap indices rise faster than the overall market, says Gaurav Garg, head of research at Capital Via. He suggests investors now become choosy and invest only in quality names.

"Since both these indices have gained ground, investors now have to look at the 'quality' of their mid-and small-cap portfolio. I believe that from here on, quality stocks will outperform the index. I strongly feel that the next three - five years will belong to the mid-and small-caps," Garg said.

In the past one month, the S&P BSE SmallCap index has gained nearly 5 per cent, as against a 4.6 per cent rise in the S&P BSE MidCap index and 2.1 per cent rise in the S&P BSE Sensex, data show. CLICK HERE FOR MARKET PERFORMANCE

Another reason for these two segments doing well, according to G Chokkalingam, founder and chief investment officer at Equinomics Research, is the interest shown by the retail investors. 

"There is a massive structural change happening in the domestic equity markets. Over 2.60 crore new investors have entered the stock markets in the last 12 months. In the next four years, investor base can even double to 16 crore. This structural change happening in the markets might lead to continuation of rally in the small and mid-cap (SMC) stocks for some more time," he said.

At a macro level though, analysts still remain bullish on the road ahead for the large-caps and the overall market and suggest the higher pace of vaccination, pro-growth policy action and improved corporate earnings should keep the momentum going for them over the medium-to-long term. CHECK BENCHMARKS' PERFORMANCE HERE

"Keeping earnings estimates unchanged (expecting an upgrade post Q2-FY22) and tweaking the price-to-earnings (P/E) multiple, we assign a fair value of 20,000 to Nifty, valuing it at 24.5x P/E on FY23 versus 22x earlier. The Sensex is seen at around 66,600 levels," wrote Pankaj Pandey, head of research at ICICI Securities in a recent note.

Word of caution

Over the longer run, Unmesh Kulkarni, managing director and senior advisor at Julius Baer India, too, remains constructive on the mid/small cap segment, especially companies that are leaders in their respective industry segments, enjoy a competitive market share and have a good track record of governance and profitability. He, however, does give a word of caution for those who plan to invest at the current levels.

"Given the sharp outperformance of mid/small caps in a relatively short period of time, it makes prudent sense to be a bit cautious at the current juncture. If any of the headwinds that the markets are facing materialise meaningfully causing a pullback in the markets, the mid/small cap segment could be vulnerable, owing to the lower liquidity of these stocks," Kulkarni said.