Small, midcaps see best start in 3 yrs; will 2020 see meaningful recovery?

S&P BSE SmallCap index has climbed over 6 per cent in January so far, outperforming the benchmark S&P BSE Sensex.

Continuing their dream run, benchmark indices touched fresh milestones on Thursday with the S&P BSE Sensex scaling the 42,000-mark and NSE’s Nifty hitting the zenith of 12,389 levels. That said, what is noteworthy is that even the broader market (mid and small-cap segments) participated in the rally.

So far in January, the S&P BSE SmallCap index has climbed over 6 per cent thus outperforming the benchmark S&P BSE Sensex, which has gained 1.5 per cent. The S&P BSE MidCap index has added 3.6 per cent during the period.  In fact, this is their best start to a new year in the past three calendar years. Earlier, in 2017, small-cap (up 5.34 per cent) and midcap indices (up 5.05 per cent) had rallied more than 5 per cent during the same period. In the past two calendar years; however, they posted negative returns. 

Though it’s very early to jump to any conclusions, analysts are of the view that the new year could see a sustainable recovery in the second-rung stocks. However, a lot depends on corporate earnings and the companies’ commentary along with Budget announcements.

"The small- and mid-cap (SMID) cohort has been in a deep bear market for the past two years with a cumulative top to trough draw down of 40 per cent. This came on the back of peak valuations that this universe hit at the start of 2018 combined with India's growth slowdown which occurred starting the middle of 2018. With valuations, performance and growth all hitting troughs, we expect SMID to recover relative to large caps and probably outperform the narrow indices, such as the BSE Sensex and Nifty. The key to their outperformance will be gaining share in profits, which seems to have started sometime over the past two quarters," wrote equity strategists Ridham Desai and Sheela Rathi at Morgan Stanley (India) in a note dated January 15. 

Mid and small-cap segments have seen sharp hammering in the past 12-18 months and most of the negatives have been captured. Hence, our view for the year is that they will tend to do better against their last two years’ performances, says Amit Khurana, Head of Equities & Head of Research at Dolat Capital.

“It is beginning to show some signs of revival as people are reallocating their portfolio and are ready to invest in these stocks. But, the real evidence of sustainable recovery will be seen in the commentaries for their quarterly earnings and how much of an impact does the budget announcement make on their business. We believe economy is bottoming out and the next few months’ data will be relatively better. Therefore, they will have a better trajectory of performance to showcase in the next 12-18 months,” Khurana added.

As many as 150 stocks from the small-cap index and Steel Authority of India (SAIL), Jindal Steel & Power (JSPL), and ICICI Securities from the midcap space have rallied more than 20 per cent in the past one month.

Deepak Jasani, Head of Retail Research at HDFC Securities, says there are two reasons behind a sharp run-up in select stocks from the mid and small-cap segment. First, attractive valuation as the stocks had witnessed huge correction and secondly, absence of any negative news. Given the large-cap space has been flat, traders are now concentrating on small and mid-cap stocks where fresh selling pressure as well as fresh negative news are absent for the time being, at least till their results are out. 

“Absence of selling pressure itself means the prices will bounce because they were falling with small amount of selling but now since the major sell-off has stopped in most of the stocks, it has itself created a scope for some bounce in the prices,” Jasani explained. 

As many as 51 stocks from midcap (11) and smallcap (40) indices including names such as Adani Enterprises, Apollo Hospitals, Balkrishna Industries, PVR, Jubilant FoodWorks, Berger Paints and Torrent Pharma have hit their respective 52-week highs on the BSE.

The S&P BSE Midcap index hit an intra-day high of 15,549 points today and was trading close to its 52-week high level of 15,662, touched on April 3, 2019.

Rajeev Thakkar, Director at Parag Parikh Financial Advisory Services (PPFAS) Mutual Fund, believes that the recovery will be stock-specific. Companies which faced governance issues or business failure may not recover, Thakkar says. The latest stock that the fund has added to its portfolio is Central Depository Services Ltd (CDSL).