250 BSE Smallcap index stocks more than doubled since previous budget; will budget 2024 provide fresh triggers?

Power generation and Distribution stocks were amongst the top performing stocks within the BSE Small Cap index.

One of the most dominant themes of the markets since the previous budget has been the consistent outperformance of small-cap stocks. Till January 25, the BSE Small Cap index has risen by ~60 percent since the previous budget, compared to 19 percent gains in the BSE Sensex.

It was not just about smallcaps outperforming key benchmark indices by 3 times.

The MSCI India Small Cap Index (USD) managed to outperform the MSCI Emerging Markets Small Cap (includes a small-cap representation across 24 emerging market countries) and the MSCI World Small Cap Index (USD), which captures a small-cap representation across 23 developed markets, by a considerable margin.

It was a broad-based rally, with at least 250 stocks more than doubling since the previous budget. Almost 40 percent of the BSE Small Cap index constituents managed to outperform the small-cap index that tracks the performance of 940 small-cap stocks.

“One year back, the small-cap stocks were undervalued,” says Purvesh Shelatkar, Head of institutional Broking, Monarch Networth Capital.

Budget announcements and the government's capex spend played a major role in shaping the market sentiment over the past year. Power sector reforms, uptick in railway budgets and infra spending got investors excited about the stocks from these sectors.

Almost all of the solar stocks rallied on the back of government announcements and higher allocation to the green energy sector, said Shelatkar.

The previous budget allocated Rs 7,327 crore for the solar power sector, including grid, off-grid, and PM-KUSUM projects. This was 48 percent higher than the Rs 4,979 crore in the revised estimates in the document.

The previous budget also saw a capital outlay of Rs 2.40 lakh crore, the highest ever for railways. Compared to 2022-23, the capex saw an increase of 65.6 percent and that magnified the rally in the railway stocks. It is widely expected that capital allocation will increase in 2024-25 for the railways to keep up the momentum in the sector.

Within the small-cap space, outperformance was seen in power generation and distribution, engineering, and electrical equipment stocks, which were direct or indirect beneficiaries of government spending in the previous two budgets.

Small-cap power generation and distribution stocks outperform

Power generation and distribution stocks were among the top-performing stocks within the BSE Small Cap index. Fifteen power generation/distribution stocks, which are index constituents, on an average, delivered 177 percent since the previous budget.

Interestingly, except the Indian Energy Exchange, which declined since the previous budget, all the BSE Small Cap Index constituents from this sector have outperformed the BSE Small Cap index returns of ~60 percent.

Electrical equipment stocks post multibagger returns

Another interesting broad-based sectoral outperformance was seen in the electrical equipment stocks. Fifteen index constituents from the space delivered, on an average, 185.93 percent returns, with at least nine stocks more than doubling since the previous budget.

 Engineering sector stocks shine

From the engineering and industrial equipment space, 63 constituents of the BSE Small Cap Index have delivered, on average, returns of over 105 percent. Almost 42 stocks, out of this list of 63, outperformed the fast-growing BSE Small Cap index i.e., generating returns over 60 percent, while an impressive list of 33 stocks turned out to be multibaggers for the period. Here is the list of the top 15 smallcap gainers from the engineering space.

Given the strong outperformance over the last year, there are doubts that the momentum can be sustained. “Investors should ignore market capitalisation and focus on a bottom-up stock-picking approach while spending time on selecting the right sector to invest in," said Shelatkar.

"Having said that, the smallcaps, as a space, are not available cheap any longer; in fact, it is in an overvalued zone. I believe that allocation to defence and railways will remain intact. It may go up as more and more routes need to be electrified as well as the network needs to be widened to be built in remote areas. Hotels, transport, and logistics companies still have a long way to go. Capital goods and engineering space still have steam left. Solar, hydrogen energy and wind energy are important sectors and still have room for growth.”

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