Small cap investing is beautiful even if it’s expensive or risky, as evidenced by the strong gains seen in the segment in FY24. Now the question is, “Is there any upside left in small cap industries?” If yes, will this type of investing provide favourable risk-return trade-off? Well, this article will be helpful in answering all these questions.
Recent data suggests that combined market cap of BSE Smallcap index of 1,000 stocks saw an increase of INR 26 lakh crore to INR 66 lakh crore now in FY24. While FY24 nearing its end, in the year gone by, ~252 stocks in small-cap index provided multibagger returns. This means that every fourth stock rewarded the investors with multi-bagger returns. Isn’t this great?
Rally surpassed sectoral boundaries and only 124 stocks delivered negative returns in FY24. We know its quite difficult to believe these types of returns. But, its true!
Top Gainers of Small cap industries
Top names in small-cap gainers for FY24 include Jai Balaji Industries (which has gone up by ~1,878%), Waaree Renewable Technologies (which increased by ~810%), Force Motors (went up by ~522%), Inox Wind (increased by ~441%), and many more.
This rally was sector agnostic as, apart from these sectors, strong momentum was also seen in defence and railway scrips. Stock has Ircon International, Jupiter Wagons, RVNL and Cochin Shipyard have delivered the returns of ~308.3%, ~326.8%, ~276.1% and ~279.7%, respectively.
As a result of strong gains in Smallcap index FY24, it goes without saying that small cap industries have now come under the lens of retail and HNI investors. Therefore, these investors continue to ask, “Is there any upside left in small cap industries?” or have these industries peaked?
Well, these investors should know that recent actions by market regulator SEBI have impacted this space to a large extent. As a result of warning of high valuations in mid-cap and small-cap space, BSE Smallcap index saw a decline of ~6.5% over the previous one month.
As a result of this correction, several analysts expect a deeper sell-off in broader market. To an extent, they have even compared the sell-off with scenario in 2018, when post a strong rally, midcap and small-cap indices fell by 24% and 31%, respectively between Jan 2018 – Oct 2018.
Future expects of small cap industries
On the positive side, analysts at global banks expect that current macro and market dynamics appear to be very different. They also expect that corrections might get restricted as a result of strong growth outlook and expectations of rate cuts. Despite the recent correction, small-cap index is up by ~61%.
Brokerages are even more optimistic about the small cap and mid-cap space. Earnings in mid and small caps have been compounded at ~30% and ~37% since 2018 against only ~16% for large caps. The brokerages expect that small caps might see healthy earnings growth over medium term.
While Nifty Smallcap100 index fell by ~14% from its respective peak, as much as 756 small cap stocks have seen a decline of over ~20% from the recent highs. Out of the lot, ~374 stocks have fallen by ~30% from their respective peak levels, with 18 of them declining at least ~50%, as per the data from the ACE Equity.
This bloodbath was much deeper in SME world as over 90 stocks declined ~20% in just 1 week. Losers in SME lot were Pritika Engineering Components, Zenith Drugs, Rachana Infrastructure, Alpex Solar, and Droneacharya Aerial Innovations.
Experts warn investors regarding risks and challenges
Market experts continue to warn investors regarding the risks and challenges arising from desire to go after profitable and speculative stocks instead of investing sensibly and forming a well-balanced portfolio. Small cap crash was felt in February-end following orders from the SEBI that mutual funds are required to develop a framework to protect small cap and midcap investors from the froth and momentum which has been building up in equities.
As a result of this, ICICI Prudential AMC recently announced its decision to temporarily halt subscriptions catering to mid-cap and small cap funds. There are other mutual fund houses too which have imposed restrictions. These include Kotak MF, Nippon India, Tata and SBI Mutual Fund.
Earlier, equity markets have been able to reward growth and momentum of growth. Experts believe that India appears to be in a strong and stable position as domestic equities are strong regarding corporate and macro-economic earnings growth.
Global analyst and fund managers believe that future appears to be promising and strong for industries whose growth is accelerating, has wider market presence and that are not over-owned.
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