In FY17, small and midcap indices record second-best performance in 7 years

Inflows of more than Rs 1 lakh cr by FPIs and domestic mutual funds led the rally

Several stocks and indices, including the Nifty, and the small-cap and mid-cap index, climbed to record highs in 2016-17 (the financial year ended on Friday), on hopes of a turnaround in the economy and earnings.
 
The benchmark Nifty on the National Stock Exchange and the Sensex on the BSE rose 19 per cent and 17 per cent, respectively, aided by strong domestic and foreign inflows.
 
The broader market outpaced the benchmarks. On the BSE, the S&P small-cap index surged 37 per cent and the mid-cap one by 33 per cent. It was the second-best performance for these indices in seven years. In FY15, the small and mid-cap indices had rallied 53 per cent and 50 per cent, respectively, as against a 25 per cent rise the benchmark index. In FY10, both indices had zoomed about 130 per cent, as against a 81 per cent rise in the Sensex.

 
A strong inflow of over Rs 1 lakh crore collectively by foreign portfolio investors (Rs 55,680 crore) and domestic mutual funds (Rs 51,293 crore) in the year led the rally. During the year, the 50-share Nifty surpassed its previous high, made in March 2015, while the Sensex missed clocking a new high by just one per cent.
 
“Over March 2015-2017, institutional flows were dominated by domestic institutions (DIIs). While inflows from DIIs were $15.9 billion, inflows from FIIs (foreign institutional investors) were relatively muted at $5 bn. The shift in institutional flows in favour of DIIs is reflected in the sharper outperformance of mid-caps and small-caps. The Nifty CNX Midcap has delivered 22 per cent return over this timeframe, outperforming the Nifty by 21 per cent,” explains Gautam Duggad, head of research at Motilal Oswal Securities.
 
Of 862 stocks from the mid-cap and small-cap indices, half (431) outperformed the market, gaining over 30 per cent. Of these 431 stocks, 106 became multi-baggers and 19 zoomed over 200 per cent. Including Aptech, Escorts, Tata Metaliks, Thirumalai Chemicals, Lumax Industries and GNFC.
 
Analysts say the rally in these stocks needs to be supported by earnings growth. Fresh investment in these segments should be made only from a long-term perspective.“The valuation of a number of mid-caps and small-caps is not at a comfortable level. That apart, it is the retail (individual) investors who are playing these themes, not the large institutional ones. In case the foreign inflow comes, it will chase the large-caps, not these segments. I don’t think the rally has much steam left. Investors should look at booking profit, as I expect the up-move to halt in the first quarter of FY18,” says G Chokkalingam, managing director of Equinomics Research & Advisory. A K Prabhakar, head of research at IDBI Capital, has a similar view. He says investors chased these stocks as they will be one of the key beneficiaries of the goods and services tax regime.

 
“Though the valuations look stretched in certain cases, the rally has more legs. Having said that, the up-move will not be a blanket rally. Only those stocks where there is value will be sought. I still see value in textile, mining, power, plywood, paint companies and battery-related counters,” he says. On earnings, analysts at Citigroup expect mid-caps to deliver growth of 56 per cent in FY17, and see this decelerate to 40 per cent in FY18.