Nifty Microcap 250 surges 29% in 2024, outruns mid, smallcap indices

A surge in investor interest in microcap stocks has seen the Nifty Microcap 250 index – a gauge of companies listed on the NSE with market-capitalisation (market-cap) of less than Rs 5,000 crore – surge nearly 29 per cent thus far in calendar year 2024 (CY24).

In the process, the Nifty Microcap 250 index outran its peers such as the Nifty 50, Nifty Midcap 150, Nifty Smallcap 100 and Nifty Smallcap 250, data shows. The index hit an intra-day high of 24,179.45 levels on Tuesday, July 16 and is trading close to its 52-week high level of 24,278.25.

The rally in microcap stocks, according to Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities, has been on the back of growth in earnings in a lot of these companies, which was then followed by money flow into this segment. Investors, he believes, bought into new ideas and sectoral rotation happened.

“That said, the upswing in a lot of these microcaps has made valuations expensive as compared to the larger peers. Though one cannot paint the entire micro-cap basket with the same brush, investors need to be careful now as to what they’re buying. High valuations of microcaps now need to be backed by earnings growth for the momentum to continue. Select microcaps in oil & gas, paper, cement etc. still offer value,” Vakil said.

Among individual stocks, IFCI Ltd., Kirloskar Brothers, Azad Engineering, Puravankara, Ganesh Housing Corporation, Sharda Motor Industries, Shipping Corporation of India, Kirloskar Oil Engines, H.G. Infra Engineering and Netweb Technologies India are some of the microcap stocks that have doubled investor’s money by surging up to 160 per cent in CY24, ACE Equity data shows.

On the other hand, Jaiprakash Associates, India Pesticides, HMA Agro Industries, Spandana Sphoorty Financial, VRL Logistics and Sanghi Industries are some of the microcap counters that have shed up to 65 per cent, shows data.

G Chokkalingam, founder and head of research at Equinomics Research, too, remains cautious on this segment, though believes select stocks that show earnings visibility can continue to rise going ahead.

“The mismatch between liquidity and overall market-cap remains a major concern. The overall market-cap has breached the $5.41 trillion mark. As overall market-cap keeps rising, the potential risk especially to smaller stocks also increases significantly as they are relatively overvalued. We admit that repeatedly saying that the risk comes from the smaller stocks has now become a boring statement,” Chokkalingam said.

Valuation-wise, the Nifty, according to analysts at Prabhudas Lilladher, is currently trading at 18.5x one-year forward earnings per share (EPS), which is at 3.6 per cent discount to 15-year average of 19.2x.

In their base case, they value Nifty at 3 per cent discount to 15-year average PE (18.6x) with March26 EPS of 1417 and arrived at 12-month target of 26,398 (25,816 earlier) for the index, which is around 7 per cent higher from the current levels.

"In our bull-case, we value Nifty at 5 per cent premium to 15-year average PE 20x and arrive at a bull case target of 28,575 (27,102 earlier). In our bear case, the Nifty can trade at 10 per cent discount to LPA with a target of 24,493 (23,235 earlier)," said Amnish Aggarwal, head of research at Prabhudas Lilladher.