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Will Mid, Smallcaps Sustain Upward Trend?

By Rex Cano, Puneet Wadhwa
Last updated on: July 10, 2024 10:12 IST
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131 stocks from the Nifty MidCap 150 index, and 211 stocks from the Nifty SmallCap 250 index are seen trading above the long-term moving average as of date.

Illustration: Dominic Xavier/

After a brief lull in the February-March period after the market regulator Securities Exchange Board of India raised concerns and directed Asset Management Companies (AMCs) to conduct stress tests, mid-and small-cap stocks have never looked back.

Around 85 per cent of the broader indices constituents' are now trading above their respective long-term moving averages.

A total of 131 stocks out of the 150 that comprise the Nifty MidCap 150 index are trading above their 200-DMA.

In the case of the Nifty SmallCap 250 -- as many as 211 stocks hold above the long-term moving average as of date.

The Nifty MidCap 150 index has rallied 43.7 per cent in the year 2023, and has galloped 171.8 per cent since the start of 2021. The index hit a life-time high at 21,369 on July 05, 2024.

Similarly, the Nifty SmallCap 250 index has surged 26.1 per cent so far in 2024. The index was up 48.1 per cent in 2023, and has zoomed 191.5 per cent since 2021.

The Nifty SmallCap 250 index registered a new summit at 17,749 on June 28.

While the Nifty MidCap 150 index has rallied over 20 per cent post March 2024, the Nifty Smallcap 250 index has gained over 24 per cent during this period.

Both the indices have outrun the Nifty 50, which has gained 8.9 per cent since then, shows data.

The 200-DMA for the Nifty MidCap 150 index stands at 17,455 -- the index is quoting 22.3 per cent higher compared to the long-term moving average.

Meanwhile, the Nifty SmallCap 250 index is quoting 23.2 per cent higher when compared with its 200-DMA at 14,371, technical charts suggest.

Over the past few months, analysts have been advising caution on the mid-and small-cap segments amid lofty valuations, and suggest investors stick to the large-caps for now.

While the markets, they said, are likely to do well amid a supportive economy, corporate earnings, they feel, now need to catch up to justify the valuations.

"Our investment committee remains constructive on India's macroeconomic environment and believes the robust economic growth fundamentals should support corporate earnings," said Jitendra Gohil, chief investment strategist at Kotak Alternate Asset Managers.

"That said, large-caps offer a more attractive risk-reward proposition compared to the overvalued mid-and small-cap space," Gohil added. "We remain highly selective in this area and recommend further weight reduction in favor of large-caps,"

Key levels to watch

At the current levels, the Nifty MidCap index is seen treading along the higher-end of the Bollinger Bands (anticipated trading range) on the daily, weekly and monthly scale.

The daily chart suggests breakout and sustained trade above 21,430 levels can trigger a surge towards 21,800 levels.

On the flip side, failure to sustain above 21,300 levels, can see the index re-test last week's low of 20,500 levels; below which the next key support stands at 20,000-mark.

The Nifty SmallCap index has given a breakout on the weekly scale.

The near-term bias is likely to remain upbeat as long as the index sustains above 17,570 levels.

On the upside, the index can spurt to 18,200 to 18,400 levels.

Failure to hold the support could see the index drift to 16,900-odd levels.

"The frontline indices are now unable to stick to higher levels. A similar trend is visible in the mid-and smallcap segments, which have seen a very strong traction," said Osho Krishan, Senior Analyst - Technical & Derivatives, Angel One.

"The upcoming results season and the Budget will see stock specific moves. There can be some cool-off once the Budget is announced," Krishnan added.

"One needs to stay very cautious in the mid-and smallcaps. The Nifty Midcap 100 index can drop to 55,800 to 56,000 levels. A breach can take it further down sharply," Krishnan pointed out.

Can Earnings Keep Up With High Stock Valuations?

Upside in the markets from here will be driven by earnings growth.

Sundar Sethuraman and Samie Modak

Photograph: ANI Photo

As benchmark indices continue to reach new highs almost every other day, a heated debate rages on: Have stocks outpaced their fundamentals, and can earnings keep up with these valuations?

Only time will tell if the earnings growth potential justifies the Nifty 50's current valuation, which hovers at nearly 25 times its FY24 earnings.

In the past five years, however, the rise in profit and stock price growth for India Inc have moved in tandem, lending credence to the notion that the markets are slaves to earnings growth.

Consider this: Earnings for Nifty 50 companies increased at a compound annual growth rate (CAGR) of 18 per cent between FY19 and FY24, almost mirroring the growth in market capitalisation during this period.

"This shows that the market is trading at a fair valuation," says Gautam Duggad, head of research of institutional equities at Motilal Oswal Financial Services.

"The 10-year average price-to-earnings (P/E) multiple is about 20.2x on a one-year forward basis, similar to current valuations."

He expects Nifty 50 earnings growth to compound at a 15 per cent CAGR over FY25 and FY26.

In FY24, the Nifty logged earnings per share of Rs 989. If earnings compound at 15 per cent and valuations remain at current levels, the index could trade at 26,000 by March 2025.

However, projections for earnings growth and valuations vary among analysts.

Some are comfortable with near-term valuations of the markets or a stock overshooting long-term averages if the potential for earnings growth is robust.

"On the aggregate market level, the India story is still priced in about halfway through this earnings cycle," says Ridham Desai, chief equity strategist-India, Morgan Stanley, in a recent interview with Business Standard.

"Earnings could continue to compound at a rate of 20 per cent over the next four-five years. Some stocks may be a bit ahead of their earnings outlook, but others are lagging."

Deepak Jasani, head of retail research at HDFC Securities, notes that both profits and earnings don't grow linearly.

"Nifty profits grew well in FY23 and FY24, but in earlier years, profit growth was not very sharp. Similarly, there is no linearity in the growth of market cap.

"India's (real) GDP would grow at 6.5 to 7 per cent, nominal GDP at 10 to 11 per cent, and corporate profitability could grow at 13 to 16 per cent," said Jasani.

"An overall CAGR of 13 to 14 per cent in market cap over the next three to four years is possible. If GDP growth remains steady, there won't be much to worry about regarding corporate profitability growth," he explained.

At a more granular level, some sectors have lagged in their earnings growth, while others, particularly financials, have seen earnings growth far outpace their market cap growth over the past five years.

Kotak Institutional Equities recently noted that tracking index-level valuations can be misleading.

'A superficial view of the Indian market is typically based on the valuations of the Nifty 50 index.

'The index may be reasonably valued in the context of historical valuations and bond yields, but most other parts of the market are trading at full-to-frothy valuations after a massive rerating in their multiples in the past 2-3 years,' the Kotak Institutional Equities report states.

Kotak Institutional Equities, in the report, highlights that the 50 companies comprising the Nifty 50 have diverse valuations ranging from 7x to 100x.

Stocks currently trading below 20x valuation have accounted for 67 per cent of the incremental profit growth over the past five financial years.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Aslam Hunani/

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Rex Cano, Puneet Wadhwa
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