Mid, small-cap stocks see post-Budget blues

The Budget may have brought good tidings for bluechip stocks, which have surged on assurances of a pick-up in the economy.

But their poor cousins -- the mid- and small-cap stocks -- have been left behind in the recent rally.

In the past two weeks, the benchmark NSE Nifty and BSE Sensex have gained five per cent in nine out of 10 trading sessions, helping them regain the lost ground in a sell-off seen around the Budget.

However, the BSE small- and mid-cap indices are still about five per cent off their highs touched during the pre-Budget euphoria.

According to experts, investors have turned wary in taking aggressive exposure in these stocks ahead of their earnings announcements. Investors fear the results might not justify the valuations these stocks are quoting, following the sharp run-up this year.

The two months between the election results announcement and the Union Budget presentation offered significant gains for the mid- and small-cap segment stocks.

During the period, the mid-cap and small-cap indices were up 16.6 and 22.3 per cent, respectively.

The NSE Nifty gained about 6.2 per cent at the same time.

“Overall, we have only seen the Nifty stocks gaining in the run-up from 7,400 to 7,800.

"There is some amount of profit-booking happening in the mid- and small-cap segment as investors feel that the June quarter earnings numbers could disappoint,” said Sunil Jain, vice-president (equity research) at Nirmal Bang Securities.

The ongoing results season has seen many large-cap names announcing their June quarter earnings numbers.

Most have been in line with market

expectations and devoid of any surprises, positive or negative.

In such a scenario, the markets do not expect a stellar outperformance by the smaller names.

“Most of the earnings numbers have been already been factored in the stock prices of these mid- and small-cap companies.

"In fact, even when some of the companies do post impressive results, the stock declines because of the sharp run-up seen earlier,” said Nirmal Rungta, director and head (private client group), CIMB Securities.

A case in point is the stock of Geometric, whose net profits tripled on a sequential basis and were up 25 per cent on a quarter-on-quarter basis to Rs 19.2 crore (Ra 192 million).

However, since its results announcement on July 23, the stock has fallen nine per cent.

Since January this year, the stock had year-to-date gains of 53.5 per cent till the time of the results announcement.

Not just smaller companies, but there is not much room left for the bluechips, too, to rally, say experts, pointing out that the Sensex now is quoting at one-year forward price-to-earnings multiple nearly 17 times, higher than their historic average.

“Foreign investor activity has also tapered, which is another indication that the market could continue to remain at current levels.

"Also, what we are seeing is a churn in the market.

Public-sector unit, infrastructure and engineering stocks, which were preferred earlier are now being replaced by the pharma and FMCG (fast-moving consumer goods) stocks, which have been underperformers,” said Rungta.

Going forward, analysts believe the underperformance of the mid- and small-cap segment would continue till the end of the results season, although some stock-specific action is not ruled out.