Small-caps give big returns
Be selective now: Analysts
The BSE SmallCap index on Thursday hit a record high of 15,878 intra-day, surpassing its previous high of 15,811 on June 22, on the back of a sharp rally in pharmaceuticals, chemicals, automobile ancillaries, public sector banks and real estate stocks. The small-cap index, finally settled at 15,790, has outperformed by gaining 31 per cent thus far in 2017. In comparison, the S&P BSE MidCap and the benchmark S&P BSE Sensex were up 24 per cent and 18 per cent, respectively, during the period.
The Sensex hit an intra-day high of 31,461 and is 62 points away from its record high of 31,523 on June 22. While the mid-cap index, which touched a high of 15,010 intra-day, is 113 points away from its all-time high of 15,123, hit on May 17.
The outperformance, analysts say, has been on account of the gush of liquidity into the markets since the beginning of the year. So far in 2017, foreign institutional investors and mutual funds have collectively invested ~96,646 crore into the Indian markets, three times higher than the ~29,518 crore a year ago, National Securities Depository (NSDL) data show. “There is ample liquidity in the market and investors are chasing stocks where they see visibility in earnings and growth potential,” explains A K Prabhakar, head of research at IDBI Capital.
Among individual stocks, Hester Biosciences, JBM Auto, Oriental Carbon & Chemicals, Gayatri Projects and Om Metals Infraprojects rallied up to 20 per cent. Caplin Point Laboratories, Prestige Estates, Sobha, Kirloskar Brothers, National Fertilizers and AstraZeneca Pharma India gained 7 per cent to 8 per cent on the BSE.
Given the run-up, analysts are now cautious on this space and suggest investors put fresh money only on a sharp correction in stock prices.
“It is not possible to paint the entire small-cap segment with the same brush. Investing in smallcaps is a bottom-up and stock-specific approach. More or less, many stocks in this segment have rallied sharply in 2017 and have become overvalued. One needs to be cautious now regarding the valuation,” says Daljeet Kohli, head of research, IndiaNivesh Securities.
Venkys India, Timken India, Transport Corporation of India, Raymond, Gruh Finance, Balkrishna Industries and Lakshmi Vilas Bank are among 27 stocks from the S&P BSE SmallCap index those hit their respective record highs intraday on Thursday.
Most real estate stocks also gained ground after Sobha that rallied six per cent to ~407 in intra-day, reported a 12.7 per cent and 11.9 per cent quarteron-quarter jump in its sales volume and total sales value, respectively, in the June quarter. “Smallcaps are getting into a vulnerable zone. The runup has happened more on account of PE (price to earnings) re-rating rather than EPS (earnings per share) growth, a cause for concern. The first round of earnings upgrades will likely be in the large-caps only. That apart, valuation of some small-caps now appears stretched. Going ahead, money will find its way into known large-cap stories. Having said that, these stocks can be bought on a sharp correction but one needs to be stock-specific,” cautions Prakash Diwan, director, Altamount Capital Management.