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Will the mid, small-cap party continue in 2022?

January 08, 2022 10:55 IST

Analysts attribute a large part of the gain in 2021 to the increased participation of retail investors in the markets, who fancy the mid-and small-caps.

Puneet Wadhwa reports.


Illustration: Dominic Xavier/

After a stellar run that saw the frontline indices – the S&P BSE Sensex and the Nifty 50 – clock gains of around 21 per cent and 24 per cent respectively in calendar year 2021 (CY21), the year gone by in real sense belonged to the mid-and small-cap segments.

Thus far in CY21, the mid-and small-cap indexes on the BSE have far outpaced the run in the frontline indices and notched up a gain of around 38 per cent and 61 per cent, respectively during this period.

Though analysts expect the outperformance to continue in 2022, they caution against the multiple headwinds in the year ahead that may dent the overall market sentiment.


A market correction if any, they suggest, will hurt the mid-and small-caps the most but should be seen as a buying opportunity.

That said, a large part of the gain in 2021, analysts attribute to the increased participation of retail investors in the markets, who fancy the mid-and small-caps.

That apart, an improvement in earnings in a lot of companies that comprise this segment lifted the overall sentiment.

“The current retail investor base is around 9.16 crore.

"I expect this to cross 10 crore over the next few months given the rise in the new demat accounts being opened by retail investors since the past few months.

"Since the mid-and small-caps are retail investors’ favourite market segment, it should continue to do well in 2022.

"That said, there can be intermittent corrections, which should be used to buy good quality mid-and small-caps,” advises G Chokkalingam, founder and chief investment officer at Equinomics Research.

On the fundamental side, small-and medium-sized companies in general, analysts said, always lag behind in business recovery.

This, in turn, results in lower participation by mid-cap and small-cap stocks during the initial phase of market recovery.

“Therefore towards the end of 2020, large-caps outperformed, while small-and mid-caps delivered lower returns last year.

"However, they participated strongly with a lag of one-two quarters in the market rally in 2021.

"Moreover, smaller companies have higher sensitivity to operating leverage.

"Hence, their earnings and profitability improves disproportionately during cyclical recovery, which also commands premium valuation during the recovery phase.

"This phenomenon resulted in their outperformance as against large-caps in 2021,” explained Mitul Shah, head of research (Institutional Desk) at Reliance Securities.

Gains in some of the stocks in these two segments have been phenomenal.

Shares of Brightcom Group, for instance, zoomed over 2,500 per cent in 2021.

A chunk of the gains in this counter came after Shankar Sharma, vice chairman & joint managing director at First Global acquired a stake in the company via the preferential route.

The company had allotted 15 million warrants at Rs 37.77 per share convertible into equity shares on a preferential basis to him in September 2021.

Tata Teleservices (Maharashtra), Nahar Spinning Mills, Saregama India, Tips Industries, Trident and JSW Energy are some of the other prominent counters that saw their market price gallop 350 per cent to 2,300 per cent in CY21. (see table)

Shah of Reliance Securities, too, expects mid-and small-cap segments to continue their outperformance in 2022, mainly due to business recovery and likely margin expansion post recent softening in commodity prices. Among the lot, he is positive on Ashok Leyland and Finolex Industries.

Puneet Wadhwa in New Delhi
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