Is worst over for mid- and small-cap stocks?

Mumbai: A month after touching their 52-week lows, mid-cap and small-cap stocks seem to have regained their mojo.

BSE mid-cap and BSE small-cap indices that hit their 52-week lows on 9 October have rebounded 7.48% and 6.77% respectively since then, while the benchmark 30-share BSE Sensex rose a meagre 2.02% in the same period. Eighty-six of 105 BSE mid-cap components and 705 of 866 BSE small-cap components have gained during the period.

While some analysts said many of these stocks have bottomed out, and are likely to continue rising, others said it is not time to buy yet.

“Valuations of a few stocks are justified; the fall was very steep. Mid-caps and small-caps have outperformed Sensex in recent times,” said Rahul Shah, assistant vice-president at Motilal Oswal Financial Services Ltd.

The BSE mid-cap index now trades at 18.35 times one-year forward earnings, below its five-year average of 18.52 times, while the BSE small-cap index trades 14.41 times one-year forward earnings, below its five-year average of 16.83 times, data from Bloomberg showed.

“I feel the quality mid-caps and small-caps have bottomed out. The sell-off this year, mutual funds’ reclassification, are all (reflected) in the price. Quality mid-caps and small-caps should look up from here,” said Shah, adding stocks such as Finolex Industries Ltd, Bharat Forge Ltd, Birla Corp. Ltd., Can fin Homes Ltd and PNB Housing Finance Ltd are likely to perform well from here.

“That said, there are some which are still expensive,” said Shah.

The top performer in the BSE mid-cap index since 9 October is Adani Power Ltd, which has gained 105.42%, followed by Godrej Properties Ltd, Mangalore Refinery & Petrochemicals Ltd, Shriram Transport Finance Co Ltd and Reliance Power Ltd, who have gained 30.78%, 30.18%, 26.82% and 24.49% respectively.

Top performers in the BSE small-cap index during the period are Sunil Hitech Engineers Ltd, Universal Cables Ltd, Dhanalaxmi Bank Ltd, Capri Global Capital Ltd and PC Jeweller Ltd. They logged 80%, 73.87%, 49.92%, 48.48% and 47.39% gains respectively.

Some analysts are not attracted by the mid- and small-cap stocks yet.

In a note on Monday, UBS said it remains underweight on small and mid-cap stocks. “Given the volatility in the markets and many moving parts, we encourage investors to look at PE multiples on an intrinsic basis (growth, cost of capital and return on capital), rather than just comparing them to historical averages,” UBS analysts said in the note.

“This (9 October-lows) can be a temporary bottom but can also be retested,” warned Arun Kejriwal, director of Kejriwal Research and Investment Services Pvt Ltd.

“The recovery has started after the earnings season kicked off, and the rally was backed by a few good numbers,” added Kejriwal.