Rally in shares of smaller firms beats larger peers
MUMBAI: Smaller companies, shares of which are typically seen as riskier than the more steady large-cap firms, have been fairly attractive this year among investors, despite their steep valuations and continuous earnings downgrade.
The BSE Small-cap index rallied 41.8%, while BSE Mid-cap index jumped 33.6% beating both benchmark indices Sensex and Nifty which were up 21-24% so far in 2017.
Analysts say that in a bull market, small-caps tend to grow faster than large-caps, while robust inflow of domestic investors’ money into Indian equities attracted lot of buyers into smaller companies.
“In a typical bull market and expected economic recovery, it is historically proven that small-caps tend to grow faster than large-caps. Besides, domestic investors’ flow is tilted towards small-cap segment compared to FII flows that largely prefer small caps, said Dhiraj Sachdev, vice-president and senior fund manager at HSBC Asset Management.
Gautam Duggad, head of research (Institutional Equities) at Motilal Oswal Securities Ltd, also added that strong capital inflows from domestic institutions is one of the major factors responsible for outperformance of mid and small-cap stocks.
“Typically, money from domestic institutions find its way into mid and small cap stocks,” he said.
So far in 2017, this year domestic institutional investments in Indian equities were at ₹72,434.67 crore while foreign institutional investors (FII) pumped in $4.82 billion worth local shares.
Not only are the small firms rising at a rapid pace this year, their contribution to India’s market capitalisation has also increased gradually.
At current levels, BSE Smallcap index contributes 18.05% to India’s market cap, growing from 17.86% in March 2017 and 16.68% in March 2016.
In contrast, at current levels, BSE Mid-cap and Sensex contribution to total market cap stand at 13.81% and 40.91% respectively from 14.62% and 41.29% at FY17 end.