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Midcap, smallcap rally coming next year, but there are riders, say analysts

There is a consensus among Dalal Street analysts that midcaps and smallcaps would pick up in the coming year, but it will be contingent on a rebound in India’s economic growth.

A dozen top fund managers and heads of research at top brokerages, who participated in the year-end survey of, said at least half of the incremental earnings growth of non-Nifty stocks are contingent on economic recovery.

“Any recovery will be more of a second half (of 2020) story than the first half. To that extent, largecaps should do well in the first half and one will have to weigh the growth patterns and then take a call whether to move to midcaps and smallcaps or not,” said Suhas Harinarayanan, Head-Institutional Equity Research, JM Financial Institutional Securities.

“From a pricing standpoint, midcaps and smallcaps are not expensive, but it is more of a timing issue,” he said.

Analysts expect a rally in midcap and smallcap stocks next year, but they said picking quality stocks from these segments would be paramount for market revival given the corporate governance issues in 2019.

“It would be prudent to be selective in smallcaps and midcaps, as that rally would not be broadbased. We expect companies with good corporate governance and strong fundamental track record to do well in Calendar 2020,” said Ajit Mishra, VP & Senior Technical Analyst at Religare Broking.

BSE smallcap and midcap indices failed to outdo their larger peers for the second straight year in 2019. Year-to-date, BSE Midcap index has slid 4 per cent and BSE Smallcap 9 per cent. In comparison, BSE Sensex gained 15 per cent and Nifty 12.5 per cent during this period.

In the last two years, the combined market capitalisation of Group B shares of BSE that represent smallcaps and midcaps has fallen 63 per cent from a 2018 January peak of Rs 20.63 lakh crore to around Rs 7.65 lakh crore now, said G Chokkalingam, Founder & MD at Equinomics Research Advisory. “This makes a case for a rally going forward,” he said.

“Historically, whenever smallcaps and midcaps have been beaten down badly, they have bounced back substantially. Of course, history doesn’t repeat itself. However, it is backed by a sound logic – after every such underperformance, the relative valuation of the segment becomes extremely appealing,” he said.

FPI, SIP culprit of skewed performance?

Analysts blamed heavy flows from foreign portfolio investors (FPIs) and SIP inflows for the skewed performance of the market. They believe most of the money from these two channels have gone into largecaps.

By December 26, FPIs poured in nearly Rs 1 lakh crore in Indian equities, while SIP inflow for the year stood at Rs 90,094 crore till November end, at the rate of Rs 8,000 crore per month. The data for December will be released in January.

Rusmik Oza, Head of Fundamental Research at Kotak Securities, said FPI flows played a bigger role in the outperformance of largecaps.

“The difference in performance between largecap and small- and midcaps will continue as long as Indian stocks are driven by fund (local or foreign) flows and not by retail/HNI flows,” said Deepak Jasani, Head of Retail Research, HDFC Securities. He said flows from retail investors would be vital for a resurgence in the broader market.

18 mid and smallcap picks by analysts:

G Chokkalingam:
Andhra Sugar, Syngene International, Sundaram Finance

Gautam Duggad, Head of Research, Motilal Oswal: Page Industries, Crompton Greaves Consumer, Trent

Manav Chopra, Head of Research, Indiabulls Ventures: Deepak nitrate

Rusmik Oza, Head of Fundamental Research at Kotak Securities: Suven Life Sciences

Sunil Jain, Head of Equity Research – Retail, Nirmal Bang: APL Apollo Tubes, DCB Bank, Jubilant Life Sciences

Vinay Pandit – Head – Institutional Equities, IndiaNivesh: Apollo Tyres, Voltas, Hindustan Aeronautics, V-Mart Retail, JB Chemicals and Astra Microwave

Vinod Nair, Head of Research, Geojit Financial Services: Aarti Industries

Source: Economic Times