Home / Markets / Midcap, smallcap stocks rebound on cheaper valuation

New Delhi: Midcap and Small-cap stocks that had been battered significantly following volatility in the markets led by Russia- Ukraine Crisis, are showing some rebound.

On a year-to-date basis, though, the BSE small-cap and mid-cap indexes are down by 4.51% and 3.73%. However, the BSE small and mid-cap indexes have gained 1.84% and 1.19% post-March 17th.

Market experts remain expect small and mid-caps to do better moving forward.

ICICI Securities Ltd in a recent market outlook report said that “The broader market indices have been sustaining well above the 52 weeks EMA (exponential moving average) that has set the stage to witness catch up activity with its large-cap peers in coming weeks. Thus, the focus should be on accumulating quality midcap stocks"

G Chokkalingam, Founder and MD, Equinomics Research & Advisory said that FY23 will be a year for small and mid-caps.

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The reason for the same is that every day new investors are entering the markets despite corrections. The large-cap stocks remain impacted due to FII selling. Many small and mid-cap stocks have corrected 30-40% and offer values. Also, individual themes can be played in the mid and small-cap space.

The rebound in the mid-cap and small caps is also being led by the attractive valuations that the stocks are trading post a steep correction seen recently.

“Mid-caps and small caps had corrected ahead of large caps. The market is undergoing sectoral churn and companies in the niche emerging segments and sectors are showing interest resulting in their outperformance" said Amnish Aggarwal, Director- Institutional Equities, Prabhudas Lilladher.

Experts such as Siddhartha Khemka Head of Retail Research at Motilal Oswal Financial Services also expect Mid-caps to do well in FY23. He says that considering 12-15% returns expected by the Nifty in the FY23 Mid-cap index should also give returns of more than 15%. Investors can look at the mid-caps selectively though taking cognizance of the quality. Certain mid-caps offer good opportunities and the same has been visible in the consistent earnings growth reported by many mid-cap companies. Many mid-cap IPO’s had also been successful in 2022 reflecting the appetitive and interest of investors in the mid-caps.

Mid-caps and small caps also offer wider opportunities in multiple sectors.

The mid-caps and the small caps usually underperform the large caps during tough times, experts say. However, the recovery is equally fast and the small and midcaps tend to outperform as the rebound takes place, feel experts. Hence most analysts, despite looking at the near-term challenges and uncertainties posed by the Russia Ukraine war, rising crude prices and inflation still are expecting and recommending mid-caps and small caps for medium to longer-term gains.

Analysts at Jefferies India Ltd in their 8th March report had said that the current market volatility could create investment opportunities for the medium term. The Indian economy recovered faster during the pandemic versus initial expectations they said and believe India would have entered a period of economic upcycle, driven by an expected revival in Capex (Govt push) and housing, which could eventually drive a broad-based investment cycle. Historical analysis suggests that Midcaps tend to outperform during phases of growth acceleration added. Thus, the recent correction could provide a good opportunity for investors to evaluate bottom-up stock ideas, the report said.

“The bottom-up approach is the right approach with a focus on companies with strong visibility on growth, reasonable price to earnings ratio and strong cash flows," added Agarwal of Prabhudas Lilladher.

Investors however need to be watchful given the current macro environment and market volatility.

AK Prabhakar Hear of research IDBI Capital said that investors should choose wisely and could take cues from the trend in the upcoming result season. Many companies can face heat on earnings growth led by rising raw material prices. Certain sectors such as IT and Pharma that may not see a much steep impact remain safer sectors to watch for, he said.


Ujjval Jauhari

Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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