Microcaps Outperform Mid/Smallcaps

'Though one cannot paint the entire microcap basket with the same brush, investors need to be careful now as to what they're buying.'

A surge in investor interest in microcap stocks has seen the Nifty Microcap 250 index -- a gauge of companies listed on the NSE with market capitalisation (market cap) of less than Rs 5,000 crore -- surge nearly 29 per cent in the calendar year 2024.

In the process, the Nifty Microcap 250 index outran its peers such as the Nifty 50, Nifty Midcap 150, Nifty Smallcap 100 and Nifty Smallcap 250, according to data.

The index hit an intraday high of 24,179.45 on Tuesday, July 16, 2024, and is trading close to its 52-week high level of 24,278.25.

The rally in microcap stocks, according to Devarsh Vakil, deputy head of retail research at HDFC Securities, is on the back of growth in earnings of several companies and was then followed by money flowing into the segment.

Investors accepted new ideas and sectoral rotation happened.

"That said, the upswing in a lot of these microcaps has made valuations expensive as compared to the larger peers," said Vakil.

"Though one cannot paint the entire microcap basket with the same brush, investors need to be careful now as to what they're buying. High valuations of microcaps now need to be backed by earnings growth for the momentum to continue," adds Vakil.

"Select microcaps in oil and gas, paper, cement still offer value," said Vakil.

IFCI Ltd, Kirloskar Brothers, Azad Engineering, Puravankara, Ganesh Housing Corporation, Sharda Motor Industries, Shipping Corporation of India, Kirloskar Oil Engines, H G Infra Engineering, and Netweb Technologies India are some microcap stocks that have doubled investors's money by surging up to 160 per cent in CY24, ACE Equity data shows.

On the other hand, Jaiprakash Associates, India Pesticides, HMA Agro Industries, Spandana Sphoorty Financial, VRL Logistics and Sanghi Industries are some microcap counters that have shed up to 65 per cent.

G Chokkalingam, founder and head of research at Equinomics Research, is cautious about the segment but believes select stocks that show earnings visibility may continue rising.

"The mismatch between liquidity and overall market cap remains a major concern. The overall market cap has breached the $5.41 trillion mark," said Chokkalingam.

"As the overall market cap keeps rising, the potential risk especially to smaller stocks also increases significantly as they are relatively overvalued," explained Chokkalingam.

"We admit that repeatedly saying that the risk comes from the smaller stocks has now become a boring statement," said Chokkalingam.

Valuation-wise, the Nifty, according to analysts at Prabhudas Lilladher, is trading at 18.5x one-year forward earnings per share (EPS), which is at 3.6 per cent discount to a 15-year average of 19.2x.

In their base case, the analysts value Nifty at 3 per cent discount to 15-year average PE (18.6x) with March 26 EPS of 1417 and arrived at 12-month target of 26,398 (25,816 earlier) for the index, which is around 7 per cent higher from the current levels.

"In our bull case, we value Nifty at 5 per cent premium to 15-year average PE 20x and arrive at a bull case target of 28,575 (27,102 earlier)," said Amnish Aggarwal, head of research at Prabhudas Lilladher.

"In our bear case," added Aggarwal, "the Nifty can trade at 10 per cent discount to LPA with a target of 24,493 (23,235 earlier)."

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Ashish Narsale/Rediff.com