Small-, mid-caps erase most losses since mid-March

“While the year-end profit booking, Sebi advisories to mutual funds to curb froth in smids (small- and mid-cap counters) and overvaluation in some counters caused the broader market indices to correct sharply till the middle of last month, selective picking by funds and other investors at lower levels erased the losses in the second-half, which we believe will continue,” said Nityanand Prabhu, ED & business head of LIC Mutual Fund.

On Monday, the Nifty Smallcap 250 index rose by 3.01% to 14,762.15 while the Nifty Midcap 150 rallied 1.79% to 18,084.70 on Monday, outperforming the Nifty and Sensex, which cooled off after hitting fresh record highs of 22,529.95 and 74,254.62, respectively. The Nifty closed 0.6% up at 22,462 and the Sensex ended up half a percent at 74,014.55.

After Monday’s rally, the Nifty Smallcap index traded just 4.7% below its record high of 15,489.5 on 7 February. And the Nifty Midcap traded a mere 1.4% below its record high of 18,345.1 on 8 February.

To put it in perspective, the small-cap index had plunged 14.2% from its record high to a low of 13,824.3 on 14 March while the mid-cap index fell 8.9% from its record to a low of 16,717.95 on the same date.

Despite the correction, the rally in the small- and mid-cap indices has outshone that of Sensex and Nifty in FY24—Nifty Smallcap 250 rose 63.07% and the Nifty Midcap 150 by 56.5% against the Nifty’s 28.6%.

While caveating that stocks with low free float could correct more, Prabhu said buying in other smid counters will discount healthy earnings growth in the March quarter and ahead.

The Nifty Smallcap 250 saw its earnings per share (EPS) rise 21% year-on-year to ₹139.8 a share at the end of the December quarter. The Nifty Midcap index saw its EPS rise a whopping 87% y-o-y to ₹171.8 over the same period.

Prabhu expects earnings growth in smids to be in healthy double digits.

A time series of the past six years to FY24 shows that the benchmark small-cap index has corrected four out of six times. It rebounded three out of five times through FY23.

“The portfolio rebalancing of domestic investors is mostly in favour of buying, and liquidity in capital markets is improving,” said Nirav Karkera, head of research at Fisdom. “Structurally, the uptrend is intact and intermittent corrections have served as opportunities to buy good stocks at attractive valuations as hinted by the time series.”

In small-caps, the top 25 stocks have contributed to 37% of the rally by points since mid-March. Some of the rally contributors include BSE (4.68% of the rally), AngelOne (2.31%), KEI Industries (2.03%), Hindustan Copper (1.88%) and Nalco (1.74%).

In midcap 150, the top 10 stocks have also contributed 36% of the rally since mid-March. The top performers include Yes Bank (3.54%), Max Healthcare (3.05%), Indian Hotels (2.94%), Indus Towers (2.93%) and Torrent Pharma (2.78%).

The results of stress tests of small- and mid-cap mutual funds initiated by the markets regulator came through on 15 March. Experts said while some numbers appear on the higher side, there is less cause for concern given the liquidity available with the fund houses to meet a potential mass redemption.

As per the stress test results, the top 10 small-cap funds in the Indian mutual fund industry may need 6-30 days to liquidate one-fourth of their portfolio and 12-60 days to liquidate 50% of their portfolio under stress conditions.

Similarly, the top-10 midcap funds would take 2-17 days to liquidate 25% of their portfolio and 4-34 days to sell 50% of their portfolio in the event of a market drawdown.

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Published: 01 Apr 2024, 10:50 PM IST