PAT to GDP ratio of smallcaps at 0.7% of GDP has more room for expansion: ICICI Securities

Buying

The Nifty Smallcap 250 index has lost more than 8 percent and the Nifty midcap 150 index 5 percent in the past month following a sharp selloff in the broader market.

The correction has spooked retail investors even as some buying in select small caps and midcaps is visible.

According to a strategy report by ICICI Securities, a “purple patch” is likely in terms of profitability in an “investment rate” driven upcycle. “PAT to GDP” ratio in the listed space has been rising and reached mid-cycle range of 4.9 percent (4.3 percent in FY23), the March 16 report said.

From a long-term perspective, the maximum upside in terms of “PAT/GDP” going ahead is left within smallcaps, which have reached 0.7 percent of GDP compared to their cycle peak of 1.2 percent, the report said.

Also read: Promoter buying picks pace in smallcaps as stocks tumble. Here's the March list

The earnings growth for the FY23-FY26 period for Nifty Midcap 100- ex Vodafone and the Nifty small cap 100 is expected to be 25 percent. For the benchmark Nifty, the growth is expected to be 17 percent.

One of the reasons why the broader indices may do well is their relatively higher weightage in industrial sector and discretionary consumption space, which stands to benefit from the current demand environment emanating from capex cycle and discretionary consumption, the report said.

The report indicates 56 percent, 38.38 percent, 39.33 percent and 30.19 percent weightage to capex and manufacturing related companies in the Nifty Microcap 250 index, Nifty Smallcap 100 index, Nifty Midcap 100 index and Nifty, respectively.

The higher weightage to the capex and manufacturing-related companies in the broader market indices is expected from the broader markets.

Nifty Smallcap 250 

The Nifty smallcap 250 index closed 0.29 percent down on March 18, with at least seven index constituents gaining more than 5 percent, 24 stocks moving higher between 2 to 5 percent and at least 85 index constituents gaining upto 2 percent.

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