Correction in midcap, smallcap stocks an entry opportunity; TVS, Zomato best picks among ‘fallen angels’: Emkay Global
- The best picks from ‘fallen angels’ in our model portfolio are Ambuja Cements, TVS Motor Company, and Zomato. We also see this as an entry opportunity for our small-cap picks, all of which have corrected sharply, Sen said
The Indian stock market has seen a decent correction in the midcap and smallcap stocks during the month of March. The Nifty 50 returns for the month so far also remain muted.
This correction in March is an entry opportunity from a 6-12 month perspective, according to Seshadri Sen, Head Of Research And Strategist at Emkay Global Financial Services.
The fall in midcap and smallcap stocks was catalyzed by stretched valuations and worries on liquidity risk in SMID funds. However, the analyst believes that the fundamentals remain strong with broad-based earnings growth continuing in FY25, albeit with some deceleration.
Sen expects the market to rebound in 3-6 months when SMIDs would start to outperform again and the ‘hide in large-caps’ trade would unwind. He sees this as a ‘buy-the-dip’ correction, with the only caveat being to avoid SMID stocks with elevated valuations.
“We believe the correction in March has been due to frothy valuations and worries about liquidity in SMID funds and stocks. The moderate headline correction hides a long tail of stocks that have taken it on the chin. It is not the worst of post-Covid corrections, but the speed has been disrupting. Energy, real estate, and materials were key underperformers, with the first two driven by mean reversion,” Sen said in a note.
He targets Nifty at 24,000 with the overall strategy stance of buy on dips being unchanged. The brokerage firm prefers smallcap and midcap stocks, given bottom-up logic. The overweight sectors are consumer discretionary, materials, and industrials; and the underweight sectors are financials, IT, and FMCG.
“The best picks from ‘fallen angels’ in our model portfolio are Ambuja Cements, TVS Motor Company, and Zomato. We also see this as an entry opportunity for our small-cap picks, all of which have corrected sharply,” Sen said.
He believes there are multiple triggers for the bounce back in 1-2 quarters, such as an expected NDA victory in the upcoming Lok Sabha elections 2024, the first reform-oriented budget of the new government and monetary easing from the US Federal Reserve and the Reserve Bank of India (RBI).
The earnings forecasts have been resilient with Nifty FY25 Earnings Per Share (EPS) estimates remaining flat as compared with December 2023 and stock-level earnings cuts in Q4FY24 being more benign than those in April-December 2023.
“Exceptional macro stability continues with the inflation trajectory as the only minor worry, and we see monetary easing in Q2FY25. The EPS growth deceleration for FY25 over FY24 is a worry, but absolute growth is still healthy,” he said.
The SMID rally is a bottom-up, driven by the shift in India’s economic growth from consumption and services to manufacturing and investment. The incremental profit pool is shifting away from sectors like banks, FMCG and IT, which dominate the large-cap universe.
“Manufacturing sectors, on the other hand, are dominated by SMIDs, which, willy-nilly, have driven the market’s rally. This trend should continue to be the focus of the government’s policy and incremental growth is unlikely to change soon,” Sen said.
He believes SMID rallies are inevitable, inherently more volatile, and offer frothy valuations, followed by short and sharp corrections, like this one.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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