Though slowly, tide is indeed turning for mid, small-caps

So far in September, the S&P BSE Small-cap index has gained nearly 3 per cent as compared to a modest 0.2 per cent dip in the S&P BSE Sensex.

Illustration: Dominic Xavier/Rediff.com

The tide seems to be slowly turning for the mid-and small-cap segments.

After a sharp correction post the presentation of Budget in July 2019 that dragged the S&P BSE Midcap and S&P BSE Smallcap indices lower by 9.8 per cent and 12.6 per cent, respectively till August 30 (S&P BSE Sensex down 6.5 per cent during this period), the sentiment in both these segments has started to pick up in September.

Thus far in September, the S&P BSE Small-cap index has gained nearly 3 per cent as compared to a modest 0.2 per cent dip in the S&P BSE Sensex.

A similar story is playing out in the mid-cap universe, with the S&P BSE Midcap index gaining around 1.3 per cent till September 12.

Analysts say the fall in the mid-and small-cap segments has been very sharp over the years, which presents a good opportunity for investors to get in now and stay invested for the long-term.

They, however, do caution against the intermittent volatility, but remain convinced about the long-term prospects.

“The cumulative market-capitalisation (market-cap) of B Group stocks, which mostly comprise the mid-and small-caps, had slipped from Rs 20-lakh crore 20 years ago to Rs 8.87-lakh crore by 2009.

"This translates into a sharp fall of around 56 per cent, and is unprecedented.

"That said, the recent up move is here to stay and those who are willing to stay invested for at least 12 – 24 months can look to buy quality stocks,” says G Chokkalingam, founder and managing director, Equinomics Research.

Gains in some of stocks in September have been sharp. Shankara Building Projects (up 81 per cent), Goa Carbon (48 per ecnt), 3I Infotech (44 per cent), Star Paper Mills (43 per cent), Ruchira Papers (41 per cent), Bajaj Hindusthan (39 per cent) and Eros International (34 per cent) are among the key gainers.

Some, however, have been news-driven. Prabhat Dairy, for instance, moved up on reports that the company plans to delist.

A visible slowdown in the economy, especially the auto industry, liquidity issues, stretched working capital cycles and wealth erosion effect that is hurting promoters as well are some of the issues, analysts say, that are plaguing the mid-and small-cap segments. However, the market reaction to these issues, they say, has been overdone.

“The market, as always, is overreacting with the small-cap index underperformance sharpest in last 15 years.

"While the small-cap index is currently at July 2016 levels, Nifty is up around 35 per cent, Sensex around 40 per cent and midcap index around 17.5 per cent vis-à-vis July 2016.

"The relative valuation of Nifty and small-cap indices is touching post-Lehman and 2013 lows.

"The downtrend from here on can be only in line with Nifty," says an India Strategy report from Equirus Capital.

A K Prabhakar, head of research at IDBI Capital, too, remains optimistic on the road ahead for the mid-and small-cap segments and advises investors buy selectively now and keep the faith intact for the next 12 – 24 months.

“Mid-and small-cap stocks have seen a sharp fall since the past 21 months and the valuation of select stocks have turned attractive. Investors should not worry if they buy growth and quality names.

"Life insurance, hotels, fertiliser, power, select banking names and infrastructure sector are the ones I am bullish on,” Prabhakar says.