Analysts bullish on mid-and small-caps; expect outperformance in 2021

The S&P BSE Small-cap index has outperformed with a rally of 86 per cent from its lowest intra-day level in March 2020 to 16,003 levels now.

Even as front-line indices — the S&P BSE Sensex and the Nifty50 — scale new highs, mid- and small-cap segments, too, have seen a good run over the past few months, with both indices hitting a fresh 52-week high on Wednesday.

The S&P BSE SmallCap index has outperformed with a rally of 86 per cent from its lowest intra-day level in March to 16,003 levels now. The S&P BSE MidCap index has moved up 70 per cent during this period — mostly in line with the S&P BSE Sensex that has gained around 72 per cent, shows the data.

Analysts attribute the outperformance to a host of factors, particularly the interest shown by retail investors to make a quick return during the lockdown period.

“Only the leaders in their category/sector within mid- and small-caps have done well as the economy opened up gradually after a stringent lockdown. The valuation gap between these leaders and the rest has grown over time. Now, the laggards should also catch up. That apart, a lot of investor money, especially from retail investors, found its way into these two market segments during the lockdown. All this resulted in mid- and small-caps doing well over the past few months,” says G Chokkalingam, founder and chief investment officer, Equinomics Research & Advisory.

Despite a sharp rally, analysts still remain bullish on mid- and small-caps and expect them to outperform large-caps in 2021. Though there can be intermittent correction, stock selection will be key. Portfolio returns, say analysts at Morgan Stanley, are more likely to be driven by bottom-up stock-picking rather than top-down macro forces.

“We expect the broad-market small- and mid-caps to beat the narrow indices or large-caps in 2021 because we think concentration of market cap and profits may have peaked with the return of the growth cycle. Expect domestic cyclicals to outperform exports, with rate-sensitives and consumers outperforming, whereas energy should underperform,” wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley, and Sheela Rathi, their equity research analyst, in a November 15 co-authored report.

On their part, most economists have been recalibrating the economic growth prospects of India after resumption of business activity.

Goldman Sachs, for instance, upgraded its India gross domestic product (GDP) forecast to a contraction of 10.3 per cent in 2020-21 (FY21), against its earlier estimate of a negative growth of 14.8 per cent during this period.

Moody’s, too, has recalibrated its numbers and now expects India’s GDP to contract 8.9 per cent in calendar year 2020 (CY20), compared to its earlier estimate of 9.6 per cent contraction. Similarly, India’s GDP forecast for the calendar year 2021 (CY21) has been revised upwards to 8.6 per cent, from 8.1 per cent projected earlier.

Among individual stocks from the mid-cap space, Adani Green Energy, Ashok Leyland, Balkrishna Industries, Info Edge (India), and PI Industries are trading at their respective record highs.

Indiabulls Real Estate, STC India, Gati, Puravankara, IG Petrochemicals, Apcotex Industries, CARE Ratings, NRB Bearings, and Somany Ceramics from the small-cap universe have found investor interest over the past few months.

“Besides broadening of the market, we believe the mid-cap performance will gather steam on the back of price and valuation comfort based on historical evidence, strong earnings revival relative to large caps, and robust institutional flows,” wrote analysts at Elara Capital in a November 11 report.

Chokkalingam suggests investors start to nibble at mid-and small-caps now before economic activity comes back fully. “CY21, I believe, will be the year of mid- and small-caps despite intermittent corrections, provided economic recovery sustains,” he says.