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Small-cap index at new high; analysts advise caution

April 09, 2021 13:32 IST

Analysts caution that investors may now cherry-pick based on the company’s growth prospects.

Small cap stocks

Illustration: Uttam Ghosh/Rediff.com

Shares of small-cap companies have been on a roll with the S&P BSE Small-Cap index hitting a new high in intra-day deals on Thursday.

The rally has been fueled by an up move in stocks of chemicals, cement, graphite electrode makers, pharmaceuticals and information technology (IT) shares.

 

In the past two weeks, since March 25, the index has outperformed the market by gaining 7.3 per cent.

In comparison, the S&P BSE Midcap index was up 6.1 per cent, while the S&P BSE Sensex gained 3.6 per cent during the same period.

A large part of this rally is attributed to the economic recovery over the past few months, which analysts feel will directly benefit small and mid-sized companies.

That apart, investors have tasted success and made a good return over the past few months in this market segment.

This, analysts say, could continue for some more time, but caution that investors may now cherry-pick based on the company’s growth prospects.

“Investors are becoming selective and off-late have been investing in stocks of companies where they see growth opportunity.

"While at the broader level the indices may remain volatile, there will be investment-worthy opportunities across the markets, especially the small-caps.

"That said, they should also be mindful of the rising Covid cases and the movement curbs put across select cities, which could hurt economic recovery and businesses,” said A K Prabhakar, head of research at IDBI Capital.

Among individual stocks, HEG, Graphite India Happiest Minds Technologies, NIIT, Cigniti Technologies, Hinduja Global Solutions, Sonata Software, Route Mobile Dr. Lal PathLabs, Neuland Laboratories, Laurus Labs, Panacea Biotech and Sequent Scientific are some small-cap counters that have been in the limelight recently.

Fiscal 2021-22 (FY22), according to G Chokkalingam, founder and chief investment officer at Equinomics Research will belong to the mid-and small-cap segments.

He expects these two segments to outrun their large-cap peers going ahead.

“Retail investors have been at the core of the recent rally in the small-and mid-caps over the past few months.

"Their interest in the small-caps is likely to be maintained in FY22 as well.

"Though the smallcaps have gained a lot from the 2018 lows, there are several stocks still that trade at attractive valuation.

"Moreover, private equity players have been investing in listed space (select large-caps) and this trend is likely to spill over to the mid-and small-caps as well.

"All this should keep the momentum in small-caps going over the next few months, provided there are no unseen market risks that emerge,” Chokkalingam said.

Despite the Covid-related headwinds, Indian markets registered their best financial year performance in a decade in FY21.

While the Sensex and Nifty50 surged 68 per cent and 71 per cent respectively, gains in mid-and small-caps have been sharper with both the indices rallying 91 per cent and 115 per cent, respectively on the BSE.

For Amarjeet Maurya, assistant vice-president for mid-cap research at Angel Broking, the second wave of Covid infections and the ensuing curbs remain an immediate headwind for the markets, including the mid-and small-caps.

However, he suggests investors who can digest volatility to look at quality smallcaps at the current levels with a one-two year horizon.

“Quality smallcaps will do well over time, despite the near-term headwinds.

"Investors should look at companies where earning prospects are good and the company is on a sound fundamental footing.

"Such smallcap stocks will stand the test of time and will deliver good earnings growth over the next two years. However, one needs to be patient with the investment,” he says.

Deepak Korgaonkar and Puneet Wadhwa in Mumbai/New Delhi
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