Mid-cap, small-cap indices outsmart Sensex with 1.7% gains this year

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Mid-cap and small-cap stocks began outshining the bigger benchmark gauge since the time Russia declared a war on Ukraine and, this trend is likely to continue for the rest of the year, according to experts.

Since February 20, BSE Midcap and Smallcap advanced 14 percent and 17 percent, while the Sensex gained only 8.2 percent. So far this year, the BSE Midcap and Smallcap indices have risen 1.7 percent each, while the benchmark climbed 1.3 percent.

Analysts believe that the recent correction in the market since October 2021 have made mid-cap and small-cap stocks good investment options. Both are trading cheaper than the large-cap stocks. However, they caution that the volatility cannot be avoided in the near term on rising fear of higher inflation, a slowdown in economy and a downgrade in future earnings.

This has been one of the most volatile years since the outbreak of the COVID-19 pandemic in 2020. The year 2022 has been marred by incessant selling from foreign investors, Russia’s invasion of Ukraine, soaring global crude oil prices and a first interest rate hike by the US Federal Reserve in four years.

"In every bull market, the broader market outperforms . Mid-caps are normally high-beta stocks and, therefore, outperform large-caps in a bull run. This outperformance will be higher during the times of retail exuberance like the present. Retail largely prefers small and mid-caps to large-caps. Another reason for the current relative mid-cap outperformance is that segments of large-caps like autos and FMCG are under margin pressure due to high commodity prices," said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

"The outperforming mid-caps are largely sector agnostic. Among different sectors, IT, pharma, chemicals, realty and QSR are likely to report good Q4 results," Vijaykumar said.

Brokerage firm Nirmal Bang came out with a report on the mid-cap sector on April 7. The report has divided its coverage into three sections: (1) Specialty Chemicals (2) Specialty Ingredients and (3) Other Mid-Caps.

Overall, Nirmal Bang believes that the strong growth trajectory should be maintained in Specialty Chemicals as well as select Specialty Ingredient companies. Despite elevated costs of inputs, freight and power, the brokerage firm believes that the impact on margins of its chemicals coverage universe should be limited on account of adequate price hikes, improved product mix and operating leverage.

The brokerage firm doesn't foresee any meaningful impact from the Russia-Ukraine conflict on its chemical coverage universe as the revenue salience and dependency for input materials on Russia is fairly low. However, the elevated input cost scenario because of the ongoing geopolitical issues is a cause for concern. The firms with core focus on the specialty businesses should be able to navigate through these challenges in a relatively better manner.

"In our specialty chemicals coverage universe, we expect strong demand momentum across the board (41% YoY growth for coverage companies) in 4QFY22. We expect strong growth from segments like Refrigerant Gases, manufacturing and Other Specialty segments. 4Q is the best quarter for the Refrigerant Gas segment and considering the strong summer", Nirmal Bang said in its report.

For specialty ingredients coverage, it is expected to deliver strong revenue growth (48 percent YoY), especially oleochemicals companies. "For oleochemicals companies, despite continued input cost inflation, we are building in margin recovery on QoQ basis on account of a favourable base (EBITDA margin bottomed out in 3QFY22, in our view), better pass-through mechanism, shift to FOB + actual freight model etc", the brokerage firm added.

"Overall, we expect moderation in revenue growth due to strong demand in the base quarter. Besides, high commodity cost pressure would continue to dent margins. We believe this could be the broad trend and one needs to be selective given the varied sectors in this space," Ajit Mishra, VP-Research at Religare Broking, said.