In what could be the beginning of the tide turning in favour of largecaps, smallcap stocks have begun to underperform with the smallcap index losing more than 2% of its value in the last one month as against 2% rise in the bluechip Nifty index. The impact has been felt on at least 30 smallcap stocks which gave multibagger returns last year but have now given negative returns in double-digits.

A screener of the top gainers of 2023 shows that over 60 smallcap multibaggers have given negative returns this year. Out of them, 30 have eroded wealth in between 10-30% so far in the calendar year.

IFGL Refractories, which impressed in 2023 with a smart 207% upside, is now among the worst losers with 30% downside in the first 2 months of the year.

Similarly, Permanent Magnets, PG Electroplast, Ramky Infrastructure, Syrma SGS Technology, Angel One, Ion Exchange (India), Paramount Communications, Himatsingka Seide, R Systems and Titagarh Rail have lost at least 10% this year.


In 2023, the smallcap index was the top gainer as it ended with a gain of 55.6% vs midcap’s 46.6% return and 20% upside seen in Nifty. However, in the last one month, the tables have turned as Nifty is up 2.3% and Nifty Smallcap100 down 2.4%.

While many value investors had turned cautious in the last few weeks following overheating in large pockets of the smaller end of the market, Sebi’s letter to mutual funds to protect small and midcap investors from froth also served as a red flag.

What should investors do?

A large part of the smallcap rally of 2023 was attributed to the faith shown by domestic investors including mutual funds, small retail investors and HNIs. As the negative narrative around froth building up in smallcaps is building up, smallcap investors are booking profits.

“I continue to believe that we are in the middle of a very big omega bull run. If you take 5-10 years, mid and smallcaps will outperform. But having said that, largecaps will also do very well,” said Vikas Khemani, Founder, Carnelian Asset Advisors.

Nifty Midcap and Smallcap trades at 7% and 17% premium to average valuations, whereas largecaps are at 6% premium to historic levels. Analysts find most sectors and stocks overvalued with the level of overvaluation high in case of low-quality companies.

“More than valuation, sentiment is the problem because India is one of the most structural stories over the next decade. So it is the sentiment which is more worrying that people are very positive particularly on the direct equity side and derivative side. So more than valuation, I would be worried about sentiments that people are just too positive. We have always seen that when people are too negative, it is a very good period to invest and when people are too positive, it is a time to be more circumspect,” says S Naren of ICICI Prudential AMC.

According to him, the valuation comfort is more in largecaps than small and midcaps but nothing is cheap.

At 21,983, Nifty50 is trading at 20.3x/18.0x on FY25E/FY26E EPS of Rs 1082/1224, respectively, and is in the premium valuation band.

“We do not see any major potential risk to the market that causes any sharp correction, but pricey valuation may cap any significant gain in the near term. Hence investors should follow a selective approach in quality stocks for the long term,” Kotak Securities said.

Amid high valuations, markets regulator Sebi is worried about the impact of a market downturn when a sell-off can trigger huge losses to both direct equity as well as mutual fund investors.

Quantum Mutual Fund’s CIO Chirag Mehta believes that while the overall valuations in the smallcap space look high, there are pockets of opportunities which appear reasonable on PEG (Price to Earnings Growth) basis.

“To avoid being a dominant shareholder in the company, we ensure our portfolio holding to 5% of the market capitalization of the company in the smallcap fund. This reduces the risk of trying to exit a large position in the company,” Mehta said.

(Data: Ritesh Presswala, ETMarkets)

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


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