Small and midcaps throng multibagger list of 65 stocks in 2021. Can they keep cranking out triple-digit gains in 2022?

With central banks around the world continuing easy monetary policies announced last year to support growth, funds flowed into the markets. Liquidity was also aided by Covid restrictions easing up, September quarter earnings topping expectations, reduction in Covid cases, widespread vaccination, rise in credit and small investors thronging the bourses.

Both the benchmark indices – Sensex and Nifty – rose more than 35 percent from their 52-week lows of January to reach record highs in October. Widespread sectoral participation saw as many as 77 percent of the companies on the BSE 500 index crank out positive returns.

Of the 500 companies on the index, 68 percent clocked double-digit growth, 13 percent recorded three-digit return, and one firm even managed a jump of four digits: Tata Teleservices .

Translated from percentage terms, the three-digit zone saw 65 companies rise more than 100 percent during the year to become multi-baggers.

These include Trident, Poonawala Fincorp, Adani Total Gas, JSW Energy, Adani Transmission, Gujarat Fluorochemicals, Happiest Minds Technologies, Angel One, Adani Enterprises, Balaji Amines, Indian Energy Exchange, Tata Elxsi, IRCTC, Tata Power, Tata Motors and Deepak Nitrite.

“The multi-baggers of 2021 are mostly small and mid-caps that got rerated due to their sharp earnings recovery,” said Abhay Agarwal, founder and fund manager at Piper Serica Advisors.

Many of these stocks were market darlings in the small and mid-cap rally of 2017 before correcting sharply due to high valuations and lower-than-expected earnings growth, he added.

Also, many benefitted from the ‘alternative to China’ theme like Balaji Amines, Hikal and Deepak Nitrite. “And mid-cap IT companies like Happiest Minds, Persistent Systems, Tanla, KPIT, Mastek and Mindtree were rewarded for very focused high-margin and high-growth product businesses,” said Agarwal.

Recovery in economic activity boosted logistics companies like Allcargo, TCI Express and Gateway Distriparks while healthcare companies like Apollo Hospitals Enterprise and Max Healthcare profited from increased healthcare spending across the board, he added.

Going ahead, mid-caps and small-caps are expected to perform well but the bull run may lose some steam as, among other factors, the US Federal Reserve has said it would end its pandemic-era bond purchases in March and pave the way for three quarter-percentage-point interest rate hikes by the end of 2022.

“Outperformance over the Nifty is unlikely to sustain as rising external risks (Federal Reserve move, interest rates rising, commodity price rise) and volatility may drive preferences towards the large-cap basket,” said Gautam Duggad, head of research, institutional equities, Motilal Oswal Financial Services.

“Moreover, large-caps now offer better valuation comfort in our view as mid/small-cap indices are trading almost on a par with the Nifty,” he added.

Agarwal of Piper Serica feels the returns driven by the expansion of P/E multiple have already been captured in 2021 so now the earnings of mid-cap and small-cap companies will have to justify their premium valuation.

He is particularly bullish on Apollo Hospitals, AngelOne, Dixon and APL Apollo as each is a leader in their high-growth industry and uses digital tech and product innovation to improve competitiveness.

Agarwal expects companies using cutting-edge tech like Central Depository Services (India) Ltd (CDSL), Affle, Zomato, Info Edge and Jubilant Foodworks to continue cranking out market-beating returns in the new year.

Duggad differs: “We believe that such outperformance is unlikely to continue in 2022.” The outperformance in the Nifty Midcap and Smallcap 100 indices was partly due to a severe underperformance from December 2017 levels, and more importantly due to a broad-based earnings recovery, he said.

But Duggad expects markets to remain positive in 2022 on the back of strong corporate earnings. “The earnings estimates for financial years 2021-22 and 2022-23 have not seen any downgrades in the past six to nine months and we expect 35 and 19 percent earnings growth for the Nifty for 2021-22 and 2022-23, respectively,” he said.

Nitin Sharma, director of research and India site head at Fidelity International, believes companies in banking, diversified financials, materials and pharmaceuticals will see upgrades in the coming months.

“The sectors to focus first will be the ones offering a structural revenue growth opportunity like IT which is driven by rising technology spend by companies globally and increased offshoring,” he suggested. Similarly, the auto sector offers a combination of pent-up demand and a long penetration cycle for New Energy Vehicles (NEVs).

Besides the 65 multi-baggers of the year, 118 companies generated more than 50 percent returns including Coforge, Adani Power, SRF Ltd, Birlasoft, Indiabulls Real Estate, L&T Infotech, Tata Coffee, and Hindalco. 

Others include Thermax, Minda Corp, JK Tyre & Industries, Tata Chemicals, JK Cement, Fortis Healthcare, Wipro, Piramal Enterprises, Bajaj Finserv, and Grasim Industries.