Small-cap index tanks 30% in a year. Time to buy selectively, say analysts

Absence of fiscal stimulus by the government amid a weak economy, surcharge-related issue with foreign portfolio investors (FPIs) amid other global developments has dented the overall market sentiment since the presentation of Union Budget on July 5. 

The S&P BSE Sensex and the Nifty 50 have slipped around 5 per cent and 6 per cent, respectively, since then. The pain in the mid-and small-cap segments has been more pronounced with both the indices slipping nearly 8 per cent and 11 per cent, respectively, during this period.

Casting the net wider reveals a worrisome picture with the small-cap indices on the National Stock Exchange (NSE) – the Nifty Smallcap 50 and Nifty Smallcap 250 – skidding nearly 31 per cent and 25 per cent, respectively in the past one year (since August 20, 2018) and are trading in a bear terrain. 

On the other hand, the midcap indices on the NSE – Nifty Midcap 50, Nifty Midcap 100 and Nifty Midcap 150 – are approaching this phase with a fall of 17 per cent, 19 per cent and 16 per cent, respectively since the past one year, ACE Equity data show. In comparison, the Nifty 50 has slipped around 4 per cent during this period.

Typically, bear markets are associated with declines in an overall market or index like. Individual stocks can be considered to be in a bear market if they see a fall of 20 per cent or more over a period of time.

Among the mid-and small-cap segments, the markets have severely punished the counters where there have been governance-related or operational issues over the past year. Reliance Communications (RCom) tops this list with a fall of nearly 94 per cent in the past one year. All the other Anil Dhirubhai Ambani Group (ADAG) companies such as Reliance Capital, Reliance Power, Reliance Infrastructure (RInfra) have lost around 89 per cent each. Jet Airways, Dewan Housing Finance Corporation (DHFL) and Bombay Dyeing have also slipped 71 per cent to 92 per cent during this period.

“There have been governance-related or operational issues with some companies in the small-cap segment, which has dented the overall sentiment. In the process, some quality names also got battered at the bourses,” explains G Chokkalingam, founder and managing director at Equinomics Research.

Going ahead, analysts see more pain for these two segments till the time there is a pick up in the overall market sentiment and there is a visible improvement in corporate earnings. That said, they suggest investors who have an appetite for risk and can stay invested for the next 12 – 24 months to look for opportunities within the small-and mid-cap segments.

“Valuation headroom for the Nifty is limited in an environment of continued earnings downside risks. Mid-caps now trade at a discount to large-caps and offer relatively good risk-reward. However, market sentiment and a potential liquidity improvement in the economy are key pre-requisites for mid-caps to perform,” says Gautam Duggad, head (research), Motilal Oswal Financial Services.

Chokkalingam is also bullish on the small-cap segment and says it is a good time to buy from a 12 – 24 month perspective. “The only risk is that there should be no further deterioration in the economy, which in turn can impact corporate earnings and dent sentiment further,” he says.