Even though the recent rally in the market has been broad-based, small-cap stocks have been outperforming their larger peers, hinting that investors see growth coming from smaller companies.
Since June 20, 2022 when the market hit the most recent bottom, the BSE Smallcap index has rallied nearly 18 percent. In comparison, the BSE Sensex has gained 13 percent and the BSE Midcap 16 percent in the same period.
A cursory glance at the data shows outperformance is not centred on a single sector but across industries. Nonetheless, some of the biggest gainers come from auto ancillaries, capital goods, chemicals, construction materials and realty, IT and healthcare.
Stocks of these sectors are benefitting from recovery in economic activities and capital expenditure that they have planned. For instance, a Motilal Oswal analysis says 49 chemical companies have announced a cumulative capex of Rs 23,200 crore for FY22-24. These, many believe, will bring value in the sector.
Similarly, sectors like building materials, infrastructure and realty have been in demand due to rapid growth in these sectors. The realty sector has been seeing record sales, which is driving gains in allied industries. Increased government thrust on infrastructure is also creating opportunities for them.
Some analysts have also pointed out the emerging trend and believe the trend will continue. “The clearest bull market I see is in the small-caps where (stocks are going to) take out the highs of January and going to go much, much higher than that over the course of the next 12 months or so,” said renowned fund manager Shankar Sharma in a recent TV interaction.
He said the headroom for smaller companies to grow is much larger than that for bigger companies, and that's what makes small-caps much more attractive. He is bullish on the pipe sector, building materials, and some multinationals.
Pawan Bharaddia, CIO at Equitree Capital, said that a lot of companies in the small and mid-cap space are ready to outperform, given that they’ve completed or are close to completing their capacity expansions, are sitting on lean balance sheets, generating healthy cash flows and are trading at reasonable valuations after the correction.
At the same time, there are some analysts who have grown cautious on small-cap stocks and taking calls stock-by-stock after a rapid run-up in prices.
“It is going to be a challenge,” said Vinod Nair, Head of Research at Geojit Financial Services, when questioned if small-cap stocks will continue their bull run. “It also depends on what headline indices (Nifty, Sensex) do from hereon.”
Nair said he has become picky about what to buy from small-cap stocks. He sees value in cement stocks which are trading nearly half of the valuation of their larger peers but at the same time does not see value in the packaging sector where valuations are very high.
Nuvoco Vistas Corporation, Prism Johnson, The India Cements, Orient Cement, Sanghi Industries, Mangalam Cement and Deccan Cements are some of the names from the cement sector that have jumped 18-30 percent since June 20.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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