Nifty Smallcap 100 extends gains for 11th day; index up 12% since March 19

The Nifty Smallcap 100 index, a widely-tracked gauge for the performance of smallcap stocks, rose for an 11th straight day on Friday, a sign that investors remain optimistic despite the regulatory warning about market froth.

The index rose 0.84 per cent to 16,355 — the highest close since February 7 — even as the benchmark Nifty50 index ended little changed. The Nifty Smallcap 100 has risen 12 per cent since March 19, outperforming the Nifty50 index which has gained just 3.2 per cent during the same period. Previously, the index had rallied for 11 straight days in September 2023.

On February 27, the market regulator Securities and Exchange Board of India (Sebi) flagged the risk of a potential bubble in the smaller companies. The caution triggered an over 10 per cent fall in the index, with shares of several smaller companies dropping more than 20 per cent. Even as the Street was debating whether more companies will tumble into bear-market territory, there has been a sudden and sharp bounce, with the Nifty Smallcap 100 now just 1.3 per cent shy of its all-time closing high of 16,566o on February 7.

 

So that is fuelling the renewed optimism?

"With many quality stocks in the segment correcting 15-20 per cent, investors have found it attractive to re-enter,” Founder of Equinomics Chokkalingam G said, adding that the general bullishness in the markets also helped in this bounce back.

"We have many institutions upgrading India’s economic growth forecasts and other macro data, such as the credit growth for the banking sector. The flows from both domestic and foreign institutional investors are strong. One has to see whether the fundamentals justify the momentum. If it doesn't, we can see another bout of correction after some time,” he said.

In the latest upward move, the top-performing stocks from the Nifty Smallcap 100 index are largely commodity and infrastructure players.

Since March 1, when the index bottomed out, Nalco gained the most 30 per cent followed by NCC at 28 per cent. NBCC India, IRB Infrastructure Developers and Hindustan Copper gained more than 23 per cent each.

"Despite the noise regarding valuation concerns and foul play in the segment, quarterly results are expected to be unaffected. Smallcap is where retail investors are invested, and it gains largely on recommendations from their brokers and peers. Moreover, in some stocks, there are enough positive news flows, such as those bagging big orders, which is keeping investors optimistic about the potential of smallcaps,” said UR Bhat, co-founder of Alphaniti Fintech.

The Nifty Smallcap 100 index has rallied nearly 80 per cent over the past year. The sharp upswing has made not just the regulator but also analysts cautious as the gains have come on the back of valuation re-rating and not earnings growth. A note by ICICI Securities last month highlighted how equity valuations were turning “uncomfortable” as the increase in prices was not commensurate with the growth in earnings.

“The Nifty 50 index has gained 31 per cent from March 2023 lows, as against a trailing earnings expansion of about 18 per cent during the same time. The broader market price rise is even higher compared to their earnings expansion with mid-/small-/microcaps returning 62 per cent/73 per cent/100 per cent, since March 2023 lows,” said ICICI Securities strategist Vinod Karki and Niraj Karnani in a note.

As per the brokerage, the price-to-earnings (P/E) multiples have expanded by nearly 50 per cent for the Nifty Smallcap 100 index, indicating high earnings growth expectations. In another recent note, HSBC said it preferred largecaps in 2024 but the selloff in small-and midcaps had presented buying opportunities.