Despite over 20% rally from June lows, analysts bullish on broader markets

Mid- and small-cap stocks have outshone their large-cap counterparts in recent months as investors flocked the broader markets, betting on solid economic recovery and easing inflationary concerns.

From the recent lows, hit on June 20, the Nifty MidCap100 index has risen 25 per cent on the exchange, while the Nifty SmallCap100 index has leaped 22 per cent. In comparison, the benchmark Nifty50 is up 167 per cent, data shows.

Going-forward, analysts believe this broader market rally will continue as India remains one of the best performing markets globally.

"There is a lot more stream left. The fall in oil price by nearly 30 per cent from 52-week high is a big boon for the Indian economy and markets. India remains one of the fastest growing economies, has record level of banking credit growth, increased capex push, robust tax collections, and good monsoon. Given this, new retail investors continue to pour into markets," says G Chokkalingam, founder and chief investment officer at Equinomics Research.

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These developments, he adds, have given a lot of comfort to retail investors who have become active participants in the broader markets due to better pricing.

The country's demat account tally topped the 100 million-mark for the first time, in August. Over 2.2 million new accounts -- most in four months -- were opened last month, taking the cumulative figure to 100.5 million, according to data released by depository firms National Securities Depository Limited (NDSL) and Central Depository Services (CDSL).

Thus, Chokkalingam suggests investors stay invested in the markets as they are primed to hit new record highs within one or two months.  

AK Prabhakar, head of research at IDBI Capital, too, bets on the sustenance of the rally but with caveats.

"Investors should keep in mind that this rally is driven by banks, capital goods, hotels, et cetera; that is, the sectors that benefit from economic recovery. It's not a broad-based rally and hence investors should pick their stocks and sectors carefully," he adds.

On the bourses, over 460 of the BSE 500 stocks have given positive returns since June lows led by Adani Transmission (up 95.29 per cent), Tube Investments of India (84.42 per cent), Mazagon Dock Shipbuilders (72.5 per cent), and Adani Total Gas (69 per cent).
 

Other stocks that gave over 40 per cent returns include largely from housing finance companies, banks, retail (clothing and footwear), quick service restaurants (QSRs), consumer durables, and auto ancillaries.

Valuation not a concern

With the recent rally, the Nifty Midcap 100 now trades at an 18-per cent premium to large-caps at 23.2x, whereas the Nifty Smallcap 100 trades at a 12-per cent discount to large-caps at 17.2x.

However, analysts say the valuations remain comfortable given the growth prospects, and thus give decent upside to related stocks.

"India market valuations definitely are at a premium to the global peers on the back of the strong earnings. We expect sustainable strong double-digit earnings growth, and in that context, the valuations seem okay. The risk-reward seems evenly balanced. We would advise buying on dips," says Manish Jain, Fund Manager, Ambit Coffee Can PMS.

That said, global events continue to remain uncertain and analysts say weakening external economic conditions pose a major concern for the domestic markets, apart from any possible war in Taiwan and any possibility of severe contraction in the balance sheet of the US Fed.

However, recession / deflationary conditions in the US /Europe, and slowdown in economic growth in China, they say, would bring down the oil prices significantly going forward and hence be positive for the domestic markets.

Chokkalingam of Equinomics Research adds that there are several segments which offer valuation comfort in the broader markets.

"Among insurance, HDFC Life looks attractive; a few high quality PSU banks are also below their adjusted book value, while some pharmaceutical companies offer scope to accumulate at current levels," he says.