Is the worst over for microcap, smallcap, midcap stocks? What analysts say

In March, most of the small and midcap had corrected as much as 30-50 per cent prompted by market regulator Sebi's warning of expensive valuations in the space

Shares of smallcap companies continued their upward march from the March 2024 lows with the S&P BSE Smallcap index hitting a new high of 46,958.21 on Wednesday. It gained nearly 1 per cent, led by a strong rally in telecom, power, automobiles, infrastructure and capital goods stocks.

The smallcap index is trading higher for the third straight day and gained 3.3 per cent during the period. The index has surpassed its previous high of 46,821.39 touched on February 7.

The smallcap index has recovered 15.5 per cent from its low of 40,641.67 on March 13.

Analysts, however, remained sceptical on the rise seen in these stocks since their March 2024 lows. They want investors to remain cautious on microcap, small and midcap stocks as the run up has been too fast and sharp.

“Excesses in terms of valuations still remain in smallcap and midcap stocks. A bounce in smallcap stocks after a sharp fall in March 2024 was expected. The worst is not over yet for smallcaps, midcaps and even the microcaps.

Unless the earnings are able to justify the valuations, these market segments will remain iffy. Lesser-known names with low volumes in the smallcap space and less credibility in terms of management are the most vulnerable to a sharp fall,” said Gaurang Shah, senior vice-president at Geojit Financial Services.

 

Almost half or 489 of the 1,000 stocks from the smallcap index have outperformed by surging over 15.5 per cent since March 13. Of these, 195 stocks have rallied between 25 per cent and 50 per cent and the market price of 23 smallcap stocks have appreciated from 51 per cent to 95 per cent, shows data.

Among individual stocks, Transformers and Rectifiers (India) (TRIL) and Puravankara and Moschip Technologies have seen their stock prices more than double.

Cochin Shipyard, Force Motors, Hindustan Copper, Tejas Networks, GMR Power and Urban Infra and Motilal Oswal Financial Services, among notable companies, have seen their market price rally between 60 per cent and 80 per cent.

In March, most of the small and midcaps had corrected as much as 30-50 per cent prompted by market regulator Securities and Exchange Board of India’s (Sebi’s) warning of expensive valuations in the space. The volatility in the pack, analysts had said, could act as an opportunity to pick up stocks selectively for a favourable risk-reward ratio.

The run up in smallcap stocks from their March 2024 lows, according to Deven Choksey, managing director, KR Choksey, has partly been due to ample liquidity in the markets.

If valuations of smallcap stocks go out of control, Choksey believes their sustainability at the current levels will be doubted.

In some smallcap stocks, the valuations appear stretched and are prone to a correction, he said.

“There is ample money in the markets that is chasing stocks, and the ability to take risk is very high. Suppressing the prices of smallcap stocks beyond a point amid ample liquidity is not possible. If there is Rs 20,000 crore flowing into mutual funds monthly, they too have no choice but to invest. Quality smallcap stocks have a reason to go up. The investors are chasing small-cap stocks at the expense of largecaps, where the overall valuations are still attractive. There is no room for any mistake or error among the smallcaps,” Choksey added.

Nesco, Bombay Burmah Trading Corp., Indoco Remedies, Karnataka Bank, Balmer Lawrie Company, LG Balakrishnan & Bros. and Jio Financial Services are the top picks of G Chokkalingam, founder and head of research at Equinomics Research in the smallcap and midcap segments.