Small-caps: Glorious run

The index has been the top performer with a gain of 61.8 per cent since August 21.

The stock market had yet another good week with most indices closing at new highs. Besides the Sensex making a record weekly close over 20,000 points, the recent rally has also seen the mid-caps and small-caps participating in good measures.

From the lows of August 21, the Sensex has gained 43 per cent, which is quite impressive. But in the same period, all the broader indices such as the BSE 100, BSE 200 and BSE 500 have gained around 53 per cent.

The BSE Midcap index is only slightly better at 54.4 per cent, but the BSE Smallcap index has been the top performer with a gain of 61.8 per cent.

A large number of these small-caps are stuck at the upper end of the circuit filter these days. In a universe of 2,880 actively traded stocks, 1,146 stocks have made a new yearly high so far this month.

Some of these small-cap stocks were genuinely undervalued, and are going up as investors discover them. But for the rest of them, it appears like speculative interest.

A lot of these companies have fascinating stories attached "� the earnings could be doubling next year or that the land value is three times the market cap.

The data too looks dicey. According to Business Standard Research Bureau, the 12-month trailing P/E multiple for the Sensex has gone up from 18.7 to 25.6 over the past two years. Even the larger indices such as BSE 100 and BSE 500 have seen a similar increase.

On the other hand, the BSE Smallcap P/E multiple has gone up from 16.5 to 29.3. For a set of companies that are riskier than large-caps, this valuation is an aberration. Current prices can sustain only if earnings go up phenomenally, which seems unlikely.