Shares of small-cap firms were in focus on Monday, with the BSE SmallCap index recording its sharpest single-day gain in over five months to hit a 52-week high.
The rally was triggered by the Securities and Exchange Board of India’s (Sebi’s) move to tweak norms governing multi-cap funds.
Even as the benchmark Sensex declined 0.25 per cent, the BSE SmallCap closed 4 per cent higher at 15,145 points, while the BSE MidCap recorded a 1.6 per cent rise.
The small-cap index reported its sharpest gain since April 7, when it rose 4.3 per cent on the BSE. It hit a 52-week high of 15,184 in intra-day trade on Monday, surpassing its previous high of 15,132 recorded on August 28. The index closed at its highest level since April 16, 2019, when it closed at 15,172 points on the BSE.
The development has given a fresh trigger to mid- and small-caps, which could see some uptick in the days ahead, say analysts. However, they advise investors to look for earnings visibility and balance sheet strength before taking investment calls in this market segment.
“Initially, given the radical rejig, the entire small-cap universe may see a sharp rally,” said Aditya Narain, head (research) for institutional equities at Edelweiss Securities.
Out of 714 stocks in the BSE SmallCap, 228 outperformed the index with gains of over 4 per cent. A total of 24 stocks, including Multi Commodity Exchange of India, Syngene International, APL Apollo Tubes, VIP Industries, and Blue Star rallied over 10 per cent.
As many as 39 stocks from the small-cap index hit their respective 52-week highs.
“New investors have been largely chasing small- and mid-cap stocks. Their aggression will intensify, partly due to this restructuring, which favours these two segments. While MFs may buy quality small- and mid-cap stocks with adequate liquidity, many new investors may end up buying either stocks in a bubble zone (in terms of valuation) or penny stocks (not backed by strong fundamentals),” says G Chokkalingam, founder and chief investment officer (CIO) of Equinomics Research.
Those at Morgan Stanley, too, had backed the mid- and small-cap segments in their recent note on attractive valuations. They believe a number of stocks from these segments could see re-rating.
Small- and mid-caps, says Morgan Stanley, went into a prolonged phase of underperformance after peaking in early January 2018, and slid a massive 40 per cent relative to the Sensex between 2017-end and March 2020.
Stretched valuations (small- and mid-caps were trading at 50x their trailing earnings in 2017-end, over twice the multiple for the Sensex), and growth deceleration owing to policy measures like GST and demonetisation were among key reasons for the underperformance of the two segments, said Morgan Stanley.
“With monetary aggregates normalising and significant policy action underway we think growth is set to turn. Smaller firms may benefit more due to their operating and financial leverage. Small- and mid-cap valuations are looking attractive relative to GDP and money supply, setting the stage for outperformance vis-à-vis large-caps,” wrote Ridham Desai, head (India research) and India equity strategist at Morgan Stanley, in an August 18 note co-authored with Sheela Rathi.