Investors in mid- and small-cap stocks are rejoicing in the new year, riding the crest of a bull run. Reason: The BSE Small-Cap Index (up 30 per cent) and the BSE Mid-Cap Index (up 29 per cent) have outperformed the Sensex (up 21 per cent) since December 20 last year, the onset of the current rally in Indian shares.
Similarly, at the National Stock Exchange (NSE), the Junior Nifty (up 31 per cent) and the Mid-Cap Index (up 41 per cent) have beaten the rise in the S&P CNX Nifty (up 23 per cent) during the same period.
Most stocks in the mid-and small-cap segments got hammered badly in the past two years, as their financial performance was impacted by the rising interest rates, analysts say. The Indian markets slumped to a two-year low in December 2011 on growth concerns amid high inflation. The BSE Mid-cap and Small-cap indices more than halved from their all-time highs in December.
“The mid-caps had been beaten more than the index stocks and, hence, the rally is also likely to be larger. However, there was a fundamental reason behind it. With the rise in interest rates, earnings of mid-cap companies, which are more dependent on local banks for funding than larger companies, were impacted more,” said Ravi Shenoy, assistant vice president (mid-cap research), Motilal Oswal Securities. “As interest rates fall, the demand overflow for small/mid-cap companies as a percentage of revenue is higher, the operating leverage kicks in and low liquidity boosts valuations,” he added.
‘Getting euphoric’
Of the 3,298 actively traded stocks on the BSE, as many as 741 outperformed by gaining over 40 per cent each during the period. Of these, 63 turned multi-baggers and appreciated by more than 100 per cent each. The list includes JSW Holdings, STC India, Orbit Corporation, IVRCL and Lanco Infratech.
Foreign institutional investors (FIIs), which had mostly stayed away from Indian equities in 2011, have made a net investment worth Rs 24,442 crore ($4.9 billion) in Indian stocks since December 20, data from the Securities and Exchange Board of India show.
Experts believe retail investors should utilize the market rally to exit companies with weaker fundamentals.
“Things are getting a little bit euphoric,” said Deven Choksey, managing director at KR Choksey Shares & Securities. “In the short-term, weaker companies may continue to gain as there is strong momentum in the market. However, investors should focus on exiting these counters and switch to better companies.”
