After Sensex rally, mid-and small-caps likely to play catch up: Analysts

Analysts say the up move in the benchmark indices has been on account of a rally in only a clutch of stocks, which they feel is a cause for concern

At a time when the global equity markets have been the pressure of a possible escalation in trade wars, Indian markets have been resilient. Since the recent low of 32,483 levels hit on March 23, 2018 in intra-day deals, the S&P BSE Sensex has climbed nearly 12 per cent to hit a record high of 36,533 on Thursday.

Analysts say the up move in the benchmark indices has been on account of a rally in only a clutch of stocks basis the news flow rather than the rally being broad-based. This, they feel, is a cause for concern. In this backdrop, they see a limited upside for the benchmark indices from here on.

“The rally has not been broad-based. One news-based trigger has been causing select large-caps to rally. Moreover, crude oil prices plunged overnight and that has also fuelled an up move in the oil marketing companies on Thursday. This resilience / up move led by a handful stocks in not a good sign. That apart, the mid-and small-caps are yet to catch up with their larger peers,” explains Tirthankar Patnaik, India Strategist at Mizuho Bank.

And the data proves him correct. While the S&P BSE Sensex has climbed over 12 per cent since its recent low, the S&P BSE Mid-cap index has only gained to 0.3 per, while the S&P BSE Small-cap index has slipped around 2 per cent.

Among individual stocks, Tata Consultancy Services (TCS), Kotak Mahindra Bank, Hindustan Unilever (HUL), YES Bank, Mahindra & Mahindra, Asian Paints and HDFC Bank from the S&P BSE Sensex have been the top gainers – rallying 16 per cent to 34 per cent during this period, ACE Equity data shows.

Meanwhile, the S&P BSE Midcap (at 15,753 levels) and the S&P BSE Small-cap index (at 16,539 levels) are still around 14 per cent and 18 per cent away from their respective all-time highs.

“Now that the frontline indices have rallied sharply from their recent lows, there is a possibility that the mid-and small-caps take over. They have underperformed their large-cap peers over the past few months. The S&P BSE Sensex and the Nifty50, I feel, are treading on thin ice,” says G Chokkalingam, founder and managing director at Equinomics Research.

Going ahead, with the country getting into an election mode (state elections as well as the general elections), uncertainty is likely to set in, which in turn will keep the markets, especially the large-caps range-bound, analysts say.

Patnaik of Mizuho Bank sees the Nifty50 index at around 11,500 mark by December 2018 – end, an upside of 5 per cent from the current levels. 

“Market valuations are stretched. The consumption – related sector and stocks that have done well off-late are richly valued. Given the slide in the rupee, while information technology (IT), pharma and metal companies are likely to do well, the consumption story will get hurt going ahead,” he says.

R Sreesankar, co-head for institutional equities at Prabhudas Lilladher maintains a near-term trading range for the Nifty50 between 9,640 – 10,000 levels. HDFC Bank, ITC, Maruti Suzuki, State Bank of India, ICICI Bank, Indian Oil Corporation, HCL Technologies, IndusInd Bank, Larsen & Toubro, Mahindra & Mahindra, Titan Company, YES Bank, Britannia Industries, Tata Steel, SBI Life and Petronet LNG are his top picks in the large-cap universe.