MANDOT SECURITIES

 

Mid-cap, small-cap indices up 20% in three months; is a bull market underway?

According to analysts, this rally is likely to sustain and gain further momentum for the next two years.

India markets

Both BSE MidCap and SmallCap indices have surged over 20 percent each since 28 March. Analysts believe that the recent gains, stretched out nearly three months, can technically be classified as a bull market. The pause in the rate hike cycle for a second time, improved macroeconomic factors, and continued inflows from foreign investors have been the key drivers of this rally.

Stable interest costs help all companies, but mid- and small-cap companies in particular benefit more as these companies find it harder to access capital as compared to the larger companies. Expected prolonged pause by RBI with commodity costs declining, operating margins are expected to get a boost, thereby improving sentiment for these stocks.

Both BSE MidCap and SmallCap hit a fresh record high on June 14 with gains for 17 out of 18 sessions. Both Sensex and Nifty rose near record high and jumped nearly 10 percent each since 28 March.

midcap smallcap

Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities, says that the fourth quarter (Q4) earnings of many mid- and small-cap stocks were better than market expectations. Stocks from both segments witnessed sharp correction between October 2022-March 2023. In many cases, price corrections were severe and unwarranted. “Companies where the earnings growth trajectory is intact and valuations are reasonable, we expect those companies' share prices to remain in high demand," Vakil said.

The macro-economic fundamentals of the country have improved and gross domestic product (GDP) growth is accelerating. This presents an opportunity for smaller companies to increase the business pie. Valuations for this segment were deeply discounted compared with their long-term averages and relative to large-caps, analysts said.

"We expect the government to focus on showcasing infrastructural growth before the general election in 2024 and that will lead to higher execution for contractors and developers in the sector. Manufacturing is likely to continue to trend higher as the capex cycle picks up further," Vakil added.

Analysts further said that investors are looking for high-growth businesses in the mid- and small-cap spaces following underperformance by the IT sector in the form of weak earnings, subdued commentary and lower guidance from major companies like TCS and Infosys, because of the US banking crisis.

"Mid- and small-cap companies present a more diverse and promising range of investment opportunities, especially in emerging trends like renewables, electric vehicles, transportation, EMS, and defence,” said Mitul Shah, Head of Research at Reliance Securities.

The recent rally is likely to sustain and will gain further momentum for the next two years, analysts expect. "We recommend investors strategically increase their exposure in this area over the next few months. This could potentially result in significant gains over the next 18-24 months," said Gaurav Dua, Senior VP and Head - Capital Market Strategy, Sharekhan by BNP Paribas.

SOURCE _ MONEY CONTROL