Some smallcap stocks may fall 50-70%; power, defence scrips overstretched: Prashant Khemka

Prashant Khemka

A few segments of smallcap companies are overstretched in valuations, and their prices will likely fall at some point, said Prashant Khemka, MD and founder of WhiteOak Capital Management. The prices of some cyclical and domestic-oriented stocks in manufacturing, power and defence sectors are overstretched, Khemka said in an interview with Moneycontrol.

The small and midcap stocks have risen unidirectionally over the last 5 months, added Khemka. “If you look at the charts, they (small cap and midcap stocks) have gone unidirectionally upwards. Almost ballistic like the rocket taking the Chandrayaan to the moon,” he said.

Since March 28, Nifty Smallcap 100 index has given a return of 44.70 percent while Nifty Midcap 100 index went up by 37.39 percent in the same period. Nifty Smallcap fell by 4.1 percent on September 12 while Nifty Midcap went down by 3.07 percent.

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These segments in smallcaps which are cyclical, leveraged and have somewhat weaker governance would be available at lower prices. “At some point in the future, I don’t know whether it is next month, next week, next year, down the line, I believe collectively, these segments of the market would be available at lower prices than where they were at today” Khemka added.

According to Khemka, some of the smallcap and midcap shares have gained 100 to 300 percent in the last 4 to 6 months. Some of such stocks can have a sustained downturn of 50 to 75 percent, he added.

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Khemka compared the frenzy in smallcap and midcap to the 2006-07 bubble in real estate and infrastructure companies. “In the 2006-07 bubble, there was a very strong fundamental case for real estate and infrastructure.”

While the infrastructure development has played out, Khemka noted that many of the companies from the time are not around anymore, or don’t have a meaningful presence. The sector went through a very difficult time because the prices were stretched to extraordinary levels.

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Similarly, he said regarding smallcap companies right now, some of these segments, some companies would do well over time. But a lot of the companies would be available at far lower prices than where they are today,” Khemka added.

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There is no such frenzy in the large-cap companies as they posted mid to high single digit year to date returns, which is “earning cost of capital or time value of the money”, Khemka added.  Nifty 50 has risen 17.76 percent in the last 6 months.