Mid- & small-caps get a shot in the arm, add to broader rally

Mumbai: The capital market regulator’s new portfolio norms for mutual funds’ multi-cap schemes have given small- and mid-cap stocks a shot in the arm. The BSE’s small-cap index surged 4% and the mid-cap index jumped 1.6% on Monday on hopes multi-cap schemes will have to load up on shares from these categories to comply with the rules. The Sensex and Nifty ended 0.2% lower. Analysts, however, warn against getting bullish on the broader set of mid- and small-cap companies, which have been more vulnerable to economic fragilities following the coronavirus pandemic.

Punters rushed to buy small- and mid-cap stocks on Monday on expectations these would be pushed up when multi-cap schemes enter to purchase them. On Friday, the Securities and Exchange Board of India had directed multi-cap funds, which manage investor money worth ₹1.46 lakh crore, to invest at least 25% of their corpuses each in large-cap stocks, mid-caps and small-cap stocks. Currently, most of these funds have 75% of their corpus in large-caps.

The prospect of fresh inflows into small- and mid-cap stocks as a result of this portfolio shuffling enthused investors in these segments with brokers circulating lists of their preferred picks. Even as the benchmark indices slid lower, the broader market exuded confidence with advances outnumbering declines in the ratio 1,832:926 on the BSE.


Money managers said the new norms have only quickened the pace of the broader market rally as mid- and small-cap shares have been trading at cheaper valuations compared to the blue-chips. “Ultimately, fundamentals take precedence. Interest has come into the mid-and small-caps as the valuation gap to large-caps had become very high and this gap correction has been happening for the last two months. This circular has only accelerated the process,” said Sunil Singhania, founder, Abakkus Asset Manager.

The BSE Sensex is trading at a price to earnings (PE) ratio of 28.85 times on a trailing basis while the BSE MidCap index is trading at 32.6 times. While Sensex is trading above the five-year average PE, the Midcap index is trading below its five-year average PE.

“Some of the large caps are trading at 70-80 PE multiples, which cannot be fundamentally justified. There was so much money going into them. Now, there is going to be little bit of sanity as the valuation gap comes down,” said Singhania, who is bullish on mid-cap IT and pharma as they are trading at a discount to their sector large-caps.

Some, however, do not expect a one-sided rally in the overall broad market.

“I do not feel this will lead to a massive outperformance of generic mid-caps and small-caps,” said Ayon Mukhopadhyay, director — UK and Europe at IIFL Institutional Equities.

Sunil Singhana of Abakkus Asset Manager Plc said there may be selective outperformance in the broader market.

“We may see selective outperformance. There are some mid-cap NBFCs which are very attractive. There is a plethora of stocks on consumption side where mid-caps are trading at 20 times odd while large-caps are trading at lot higher valuations,” said Singhania.

The benchmark Sensex is up 51% from its 2020 low of 25,638.9 on March 24. The MidCap index is up 55.8% from its 2020 low of 9,555.24 hit on March 24 as well. The SmallCap index is up 75.65% from March 24-low.