Surge in small stocks has analysts worried

AS OF SEPTEMBER 30, EQUITY MUTUAL FUNDS HAD INVESTED IN ASSETS WORTH ALMOST ₹5.4 LAKH CRORE

MUMBAI: At least 50 small- and mid-cap stocks have hit their record highs in the past few days. While this may cheer investors, it has got analysts worried.

On Friday, while the Sensex ended down 115 points, the midcap index ended marginally in the green and the small-cap index was down just 3 points. Since March this year, the broader Sensex has risen 22% while midcap and smallcap indices have jumped around 40%.

Astech Lifesciences was among the biggest gainers on Friday rising more than 18% to hit a 52-week high of ₹486.70. Gujarat State Fertilisers also hit an annual high of ₹93.50, the stock was up 6% on Friday.

Goodyear India, TVS Motor, Kanoria Chemicals, Kwality Ltd and Godrej Industries are among the others that have hit fresh highs in the last few trading sessions.

Analysts say lot of it is has been aided by improved market conditions in sectors such as auto, tyres, consumer durables and non-banking financial services. The strong flows in mutual funds have also added to the rally.

“There is ample liquidity that is driving the broader market. However, valuations have also gone up significantly,” said Dipen Shah, senior vice-president, Kotak Securities. “Sometimes undeserving stocks also tend to rally. So investors will have to be very careful and cautious when they are investing in mid and small-caps.”

Assets under management (AUM) of equity mutual funds scaled a new high crossing the ₹5 lakh crore mark to reach ₹5.37 lakh crore in average AUM for the quarter ended September 30, 2016.

“The premium of NSE midcap index to Nifty is near its all-time high levels,” pointed Chirag Shah, analyst at brokerage CLSA. “The midcap index is trading at a 13.5% premium (above) to Nifty.”