Small and midcap stocks that touched new highs on March 3 are likely to keep the momentum going in the near term and investors can use dips in the market to get into quality shares, say experts.
On March 3, the Nifty midcap 100 index hit a fresh high of 24,513 and the smallcap250 index touched 7,204.65.
Green shoots in the economy, robust December quarter results, strong management commentary and the undervaluation of the mid and smallcap space are some of the factors powering the rally in the broader markets.
“Valuations are more attractive in mid-small-caps, there is renewed buying in this segment,” said Dr VK Vijayakumar, Cheif Investment Strategist at Geojit Financial Services.
There are more than 20 stocks in the space that have rallied more than 50-100 percent since February. The list includes Aditya Birla Capital, Tata Chemicals, Adani Enterprises, Bank of Maharashtra, MMTC, Linde India, and Hindustan Copper.
The small and midcap segment is likely to benefit the most from the Budget 2021 proposals that are pro-growth and aimed at starting a fresh capex cycle to boost growth in Asia’s third-largest economy.
India Inc witnessed earnings upgrades across sectors in the December quarter and with the economy showing signs of recovery, mid and small-cap companies stand to gain.
“Earnings estimates of small and midcap stocks ranked 100th-650th (by Mcap) indicate one clear trend—FY22 estimates saw sharp cuts during April-Jun 2020, bottomed out in September 2020 and have seen consistent upgrades since then. From the market’s perspective, it’s this earnings outlook upgrade that has been at play,” Edelweiss said in a report.
“Smallcaps are at a reasonable discount (15-50 percent) to largecap peers in the T/ITES, cement and pharma space. Some of these ideas (Ipca, Cyient, eClerx, Somany, etc) are part of our SMID model portfolio.”
The market rally closely resembles the rally that followed the global financial crisis (2008-09), not just in quantum and speed, but also the way small and midcap indices outperformed largecap indices.
The Nifty midcap 100 outperformed the Nifty by 4.7 percent in February. Over the last 12 months, midcaps are up 39 percent, compared to a rise of 30 percent in the Nifty, Motilal Oswal report shows.
Jyoti Roy, DVP-Equity Strategist, Angel Broking Ltd, also thinks that the rally in the midcap index has been led by expectations of strong earnings growth in the financial year 2022.
“Mid and smallcap companies have a greater degree of operating leverage as compared to largecaps and are therefore likely to post faster earnings growth as compared to large caps due to the continued improvement in the underlying economy,” he said.
Given the expectations of better earnings growth in midcaps, investors are increasing their allocations to midcaps, leading to the continuous rally in the midcap space, Roy said. They expect midcaps to continue outperforming the largecaps.
What to buy?
Here is a list of more than 30 stocks that are among the high conviction of global brokerage firms after December quarter results:
Continuing with the strategy of adding more earnings recovery and growth plays, Edelweiss Securities has included several new ideas to its WWV model portfolio.
“We add Bajaj Electricals, Eclerx, Ipca, Brigade, Sobha, Sterlite Tech, LIC Housing, AU SFB, Somany, Prince Pipes, Schaeffler, Galaxy and Century Ply. We exclude IEX, JK Cement, ACC, MMFS and Gulf Oil,” the report said.
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