Experts point out select mid and smallcaps look good for medium to long term horizon. They name about 20 favourite stocks
Some of India's top investors, such as Rakesh Jhunjhunwala and Radhakishan Shivkishan Damani, have either bought or raised stakes in some smallcap stocks in the June quarter.
Jhunjhunwala bought an additional 57 lakh shares in Firstsource Solutions during the quarter ended June 30, while Damani acquired 1.3 percent equity stake in Kalyani group company, BF Utilities, and 1.03 percent stake in defence sector player, Astra Microwave Products, during the quarter.
These are just a few examples. While the above-mentioned names are small-cap companies, mid-caps, too, have been witnessing traction of late, giving a strong signal to investors that they are ready to go higher.
As of July 14 close, BSE Midcap is down 11 percent and Smallcap is down about 8 percent this year. Benchmark Sensex is down 13 percent for the same period.
Time to lap up mid, small-caps?
At this juncture, select mid and small-cap names are looking attractive because of their valuation. Considering the fact that the mid and small-caps have been underperforming for the last few years and now they have started looking up, it appears to be making some sense that they may see some rally, going forward.
However, stock-selection remains the key and one should avoid getting carried away for the entire mid or small-cap pack.
Experts point out that select mid and small-caps do look good for medium to long-term perspective but this cannot be generalised and said for the entire mid and small-cap space.
"We have seen strong outperformance in most of the mid-cap and small-cap stocks mainly due to them available at a lower valuation. However, we expect lower-earning and slow earning recovery due to COVID-19. Hence, we see upside in only some quality mid-cap and small-cap stocks that have earnings visibility or fast earning recovery," said Amarjeet Maurya, AVP - Mid Caps, Angel Broking.
"We would advise keeping a bottom-up approach for stock-selection which has a strong story like gaining market share, strong leadership position, strong entry barrier in business, etc.," said Maurya.
Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities said that in the mid and small-cap space, one needs to follow bottom-up approach while knowing the company thoroughly before taking a concentrated bet.
"Ace investors who have increased exposure in select stocks in the last quarter have done so in known companies. Most mid and small-caps were already beaten down in the last two years and fell further post COVID-19 and lockdown. Hence many of them had gone down disproportionately below their intrinsic value. This provided an opportunity to many sophisticated investors to grab it and increase exposure in select few," Oza pointed out.
Oza highlighted that the first phase of recovery in Nifty from 7,500 and 10,000 saw a smart pullback in bluechip stocks.
"It is only once Nifty stabilised and crossed the 10,000 mark that mid and small-caps have sprung into action. We find the reward-risk balance for the Indian market more muted after the sharp run-up in stock prices over the past few weeks," Oza said.
"In terms of broad valuation parameter, there is hardly any valuation gap between the Nifty and Nifty Mid Cap 100 Index. Hence one should avoid mid and small-caps in general but selective stocks can be looked at on their individual merit. One needs to have a long-term view while investing in mid and small-caps at this level and also have the conviction to add more in any sharp correction," Oza said.
Arjun Yash Mahajan, Head of Institutional Business at Reliance Securities is of the view that the rally in mid and small-caps is purely the old phenomena of rotational money flowing in.
"Since March 24, 2020, first we saw a rally in the large-caps and subsequently, the valuation gap made the mid and small-caps look very attractive and thus we have seen a rally for mid and small-cap stocks," said Mahajan.
"This is purely liquidity-driven and the dichotomy between stock prices and underlying fundamentals exists and is known to all. We will see that coming to the forefront in the Q1FY21 results. In my personal view, I will look to take money off the table, book profits and wait for better entry levels," Mahajan said.
Mahajan said he would prefer blue-chip large-cap stocks. However, having said that, there are a few mid and small-cap stocks that can be considered over a two-year investment time horizon, Mahajan said.
Stocks to look at
Oza of Kotak Securities advises going for some high conviction mid and small-caps.
"The stocks we like based on business outlook, earnings and valuations are: Varroc Engineering, DCB Bank, Federal Bank, Equitas Holdings, Kalpataru Power Transmission, Castrol India, Suven Pharmaceuticals, PNC Infratech and Aegis Logistics," said Oza.
Mahajan of Reliance Securities has 'buy' calls with a 2-year horizon on Indraprastha Gas (target price: Rs 602), KEC International (target price: Rs 328), Supreme Industries (target price: Rs 1,333), Finolex Industries (target price: Rs 492) and Astral Poly (target price: Rs 1,081).Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.