Smallcap boom is back! FIIs, mutual funds team up to shop at 200 such counters

The March sell-off in smallcap stocks, induced by adverse comments from Sebi, has proved to be just a small blip with the smallcap indices back to making record highs every other day once again. While many investors continue to be worried over frothy valuations, there are at least 213 smallcaps in which both the big boys - FIIs and mutual funds - raised stakes in the March quarter.

Shareholding pattern reveals that while FIIs ignored the noise around valuations to hike stake in 56% of stocks in BSE Smallcap index, which has 1000 stocks, mutual funds were bullish on 40% of the counters.

Out of them, both the parties raised stakes in 213 counters like Lemon Tree Hotels, Reliance Power, Pricol, Suzlon Energy, SpiceJet, Cochin Shipyard, Olectra Greentech, GRSE, Mastek and Tejas Networks.



At least two of these stocks - Transformers & Rectifiers (199%) and Puravankara (102%) - have more than doubled wealth so far in the calendar year. Other prominent top gainers include Motilal Oswal Financial (90%), Cochin Shipyard (88%), Sobha (75%), Tata Investment Corporation (58%) and Shipping Corporation Of India (36%).

Also read | LIC cuts stake in 16 PSU stocks as portfolio soars to Rs 14 lakh crore

Amid profit booking, regulatory concerns over froth building up in the broader market and stress tests by mutual funds, 63% of midcap and 70% of smallcap universe saw negative returns in February and March. In stark contrast, two-thirds of the largecap universe delivered positive returns in the same period.

In April, smallcap warriors reclaimed lost territory with the indices hitting new peaks.

"We should continue to buy. When the small and midcaps were falling, nothing had changed in the economy and outlook. Yes, valuations can be overheated but it is not just for small and midcaps. It is sometimes for the larger companies as well. As long as you know your companies and your themes that you are playing, these are always good opportunities," said Andrew Holland, CEO, Avendus Capital.

He said if we are growing at 7% GDP growth and the expectation is that interest rates should fall at some point this year, investors are going to make a lot of money from small and midcaps.

Gurmeet Chadha of Complete Circle Consultants advises investors to be selective as there are pockets where valuations can't be justified.

"I would be a little more biased towards large and maybe large midcaps in terms of incremental allocation," he said.

The ongoing March quarter earnings season is keeping smallcap bulls busy as any good news is getting priced in immediately leading to sharp spikes.

"Currently, it is expected that mid and small cap baskets will deliver 7-9% higher earnings growth than Nifty basket over the next two years. This sort of higher pace of earnings growth is crucial for sustenance of mid and smallcap valuations which are at all-time high premium levels as compared to that of large caps," says Harsha Upadhyaya, CIO – Equity, Kotak Mahindra AMC.

(Data: Ritesh Presswala)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)