But analysts warn it is a high-risk, high-return game; so, retail investors should be wary.
With the broader indices, the Bombay Stock Exchange’s Sensex and the National Stock Exchnage’s Nifty, being range-bound for over a year, foreign institutional investors (FIIs) are turning their focus to select mid-cap and small-cap stocks.
Hence, since the financial year began, the mid-cap and small-cap indices have outperformed the benchmark Sensex. They’re up by one and two per cent, respectively, while the Sensex has declined six per cent in the past two-and a-half months.
Ridham Desai, strategist and head of India Equity Research from Morgan Stanley, said: “From a one to one and a half year’s perspective, we are positive on small-caps, as on a relative basis they are at the December 2008 lows. Their valuation at sub-10 times is attractive.”
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TIME TO THINK SMALL? |
According to Business Standard Research Bureau data, around 40 per cent of stocks in the small-cap index were trading below 10 times the 12-month trailing price to earnings multiples. Some small-cap companies have relative valuations at seven-year lows.
Ajay Parmar, head of institutional research from Emkay, said, “We are seeing institutional interest in mid-cap and small-cap stocks because in a range-bound market, the only place to hide is small companies. Frontline stocks are the ones which will be affected the most if the market declines further.”
The case in point is that when the markets declined from November 2010 highs, the benchmark Sensex fell 13 per cent. But stocks in the broader market indices declined around 20 per cent. This sharp fall has made many stocks valuations quite cheap.
Morgan Stanley, in a recent research report, recommended buy calls on Hathway Cable, OnMobile Global, Pantaloon Retail, Aban Offshore, IVRCL and Nagarajuna Construction.
This is not the only time broader markets have provided better investment opportunities. In June 2009, when it was a stock pickers’ market, mid-cap and small-cap indices gave around 30 per cent returns in a one-year period. At the same time, the Sensex gained 10 per cent.
While recognising the higher risk element in the broader markets because their businesses tend to be more susceptible to a tighter funding environment, Aditya Narain, managing director and head of India research at Citi, said this was an area they were looking at. But it comes with a warning note. Analysts said investors should not get carried away with stocks trading below 10 times P/E, but should look at stocks with a healthy balance sheet, decent management and history of giving dividends to the investor.
Parmar said retail investors should be cautious about investing in the midcap space because if the markets were to correct heavily, even the midcap stocks would give into the selling pressure.
