Half the small, mid-cap stocks on indices run past Sensex

Analysts expect mid-cap and small-cap stocks to remain buoyant at least till the Budget presentation

After getting battered 12 per cent in one month following demonetisation, mid-cap and small-cap indices have staged a sharp recovery. BSE small-cap has gained 11.6 per cent and BSE mid-cap 10.6 per cent since December 26, 2016. By comparison, BSE Sensex, which had hit a low of 25,807 points on December 26, has advanced 5.6 per cent to 27,411 levels.

Between November 8 (when old Rs 500 and Rs 1,000 notes were banned) and December 26, mid-cap and small-cap indices lost 11.5 and 11.2 per cent, respectively, as against 6.5 per cent decline in the benchmark index.

Of 864 stocks from BSE mid-cap and small-cap indices, more than half, or 435 shares, have outperformed Sensex, by gaining more than 10 per cent each since December 26. Total 352 stocks from these indices are trading above the levels they hit on November 8.

Stocks from fertiliser, agro chemicals, sugar, steel, and real estate have outpaced the market by gaining up to 50 per cent in the past three weeks.

Jubilant Industries, Dhampur Sugar, Lumax Industries, Dwarikesh Sugar, National Fertilisers, Delta Corp, and Punjab Chemicals have rallied between 20 and 50 per cent during this period.

Besides gradual recovery in overall sentiment, analysts attribute pick-up in these stocks to the upcoming Budget that could see incentives for infrastructure, real estate, chemical, fertiliser, and sugar sectors.

Sugar stocks, for instance, have gained on rising sugar prices and hope of policy action in coming Budget. 

"Globally, too, sugar prices have gone up, which in general has supported increase in domestic prices as well. Indian Sugar Mills Association has asked for sops on debt restructuring, rescheduling of loan repayments, and extending interest subvention (subsidy) for three years. If some major reform for the sugar industry takes place, we can see a lot of mills back in action, increasing sugar production for the next year," says an analyst at Motilal Oswal.

Word of caution

Analysts expect mid-cap and small-cap stocks to remain buoyant at least till the Budget, in anticipation of sops. They caution that fresh investment in these segments should be made only from a long-term perspective.

"For the third year, domestic institutional investors (DIIs) will remain the mainstay of institutional inflows as the conventional lure of physical assets, that is gold and real estate, fades. Mid-cap stocks appear poised to outperform the Sensex in 2017. We do not rule out expansion in mid-caps' premium in 2017. Our top mid-cap picks are CESC, Petronet LNG, Ramco Cements, Rural Electrification Corporation, Shriram Transport Finance Company, and UPL," points out Abhay Laijawala, head of India research at Deutsche Bank Group.

G Chokkalingam, founder & managing director of Equinomics Research & Advisory, too, believes that the mid-cap and small-caps will continue to outperform at least till the Union Budget presentation.

"In case the Budget gives importance to developmental outlay, the markets will turn around and the foreign institutional investors (FIIs) will come back to Indian shores. On the other hand, in case of a focus on social schemes, the FIIs may not bring in money. Though select stocks still are a good long-term bet, I feel that there is a speculative bubble already built in the mid-and small-caps, which investors should be mindful of before taking a fresh investment call," he adds.