Stocks in the small- and mid-cap segments seem to be playing catch-up with their large-cap counterparts.
Kishor Kadam & Sanat Vallikappen
MUMBAI: Stocks in the small- and mid-cap segments seem to be playing catch-up with their large-cap counterparts.
Thanks to excellent first-quarter results from a number of companies in this space, their shares have been revving up in the past few days.
A sample of 1,838 small and medium-sized companies studied by DNA Money shows that they had improved their net profitability by 31.83% in the first quarter of 2006-07.
This number is huge in itself and also on a relative basis, since the net profit growth of 51 large-cap companies that were analysed showed that they had increased profits by 19.83%.
Therefore, it did not come as much of a surprise that Friday turned out to be a red letter day for small-caps and mid-caps. While the Sensex closed up 0.39% (43.29 points) at 11,192.46 points, the BSE Midcap and Smallcap indices closed up 1.24% and 1.99% respectively.
What’s more, around 73% of the 473 stocks that constitute the BSE Smallcap index registered gains. Mid-caps were not to be left far behind, with 71% of 290 stocks that make up the BSE Midcap index also shifting into top gear.
Shahina Mukadam, head of research at IDBI Capital, argues: “One has seen a substantial upmove in the large-caps after the markets hit their recent low (on June 14, 2006). Like in any market, mid- and small-caps follow the large-caps. Since there hasn’t been any significant change in the current scenario from when the markets went down, I think the large-caps will consolidate at these levels for the next two to three months before moving up. Over the same period, mid- and small-caps will catch up with them.”
This argument can be easily understood from the way the BSE Sensex has recovered since June 14, 2006, vis-à-vis the recovery in the BSE Smallcap and Midcap indices.
While the Sensex has recovered 61% of the losses it suffered from the time the markets started falling (May 11, 2006), the BSE Midcap and Smallcap indices have recovered just 38.3% and 33% respectively.
To cap the small-stock story, here’s what Edelweiss Securities had to say in a research report dated August 7, 2006. “Strong revenue and earnings growth make the case for mid-caps compelling given their attractive valuations.”
The price-earnings multiple of the BSE Sensex, a large-cap index, is currently 19.42 while that of the CNX Nifty Junior, which has mostly mid-caps, is 15.62. The markets are obviously hoping that gap will be closed sooner rather than later.
Mutual funds also seem to be interested in value buys. When the markets were in a directionless phase following the steep climbdown from the May 10 high, fund managers preferred to restrict their exposures to large-cap stocks. “With markets stabilising, my sense is that mutual funds would be making value buys in select mid-caps,” says Mahesh Patil, equity fund manager at Birla SunLife Mutual Fund.
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