Investors can make money in mid, small-caps: SMC Global's Saurabh Jain

After a disappointing few months in calendar year 2018 (CY18), mid-cap and small-cap indices have found investor interest in July. SAURABH JAIN, assistant vice-president for equity research at SMC Global Securities tells Debashish Pachal that stocks with good fundamentals will continue to attract investor interest going ahead. Edited excerpts:

Mid-cap and Small-cap segments have underperformed in this calendar year. What is the road ahead?

Even though the indices have slipped around 10 – 15 per cent in CY18, the fall in individual stocks has been much sharper. In fact, there is a major divergence happening in the markets. While the frontline indices are making record highs, there are only few stocks that have made fresh highs along with the market. This is evident in the overall market capitalisation (market-cap) of the market, which has not gone up significantly in this backdrop.

The correction in the mid-and small-cap stocks has been largely on account of selling by mutual funds in the last few months. There were some reports that they have sold to the tune of Rs 9,000 crores. However, sanity is returning. The selling had been intense and investors are now looking to enter at lower levels. Stocks of good quality companies that have robust fundamentals, earnings visibility and good management credentials are finding buyers.

Did you see the correction coming?

See, in FY16-17, the mid cap and small cap stocks had risen sharply, a lot of money was going into these stocks, people were buying individually and were also investing in mutual funds, who in turn, were investing in these stocks. So in certain cases there was exuberance in the valuation. The P/E had risen significantly. Mid-caps and small-caps commanded a higher multiple as a lot of money was pumped in. However, there were changes – pressure on mutual fund managers to perform (in terms of generating return for investors), Sebi guidelines (change in mid-cap and small-cap definitions) – that led to a correction.

So, you recommend buying mid-and small-cap stocks at the current levels?

Well, a good amount of money can still be made in these segments, but not everywhere. That said, investors can look at stocks where the fundamental story is still intact but the stock got punished in the overall downturn in these two segments. Such stocks will continue to do well going ahead and can be bought into.

Any stocks that you recommend?

From the midcap basket, we were focusing on the information technology (IT) stocks, such as Cyient. Then there are some companies in the financial sector like Manappuram Finance and Muthoot Finance that appear good. In the hotel category, one can look at EIH Limited.

Is the bounce-back seen in July likely to stay in August as well?

We feel that the rally in good stocks should sustain ultimately. Ultimately, rationality will prevail in the market. If buying resumes in good stocks, then it will reflect on the index as well.