While Sebi may be worried about a possible bubble building up in the broader market, smallcap investors have had an unforgettable FY24 with at least 245 smallcap stocks and 23 midcap stocks giving multibagger returns this financial year.

Smallcap Jai Balaji Industries has given the highest return of 2,073% in the category, shows data of 1,000 smallcaps pulled from ACE Equity. Waaree Renewable Technologies is the next in line with a superb return of 854%.

The top 10 smallcap winners include GE T&D India, Aurionpro Solutions, Force Motors, Transformers & Rectifiers, KPI Green Energy, Inox Wind, Suzlon Energy and HBL Power Systems.

Within the BSE Midcap universe of 127 stocks, 23 have more than doubled investor wealth. Rail PSU IRFC tops the list with 407% gain, followed by REC’s 278%, SJVN 272%, BHEL 220% and PFC 209%.

In the last one year, mid/small cap indices have outperformed Nifty50 by 30-50%. While retail investors are often blamed for being over-enthusiastic in picking smaller stocks, a report by ICICI Securities shows that during the calendar year 2023, FIIs and mutual funds bought more mid and smallcaps than largecaps.

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The brokerage’s size allocation framework has been signalling that smallcaps are at their most unattractive relative valuation zone in terms of their risk premium over largecaps.

Another technical analysis of NSE Smallcap100 index by Phillip Capital shows that the index is trading at an important channel resistance with a highly overbought oscillator. From here, the brokerages see it heading towards 11400-10800 levels which is an important channel support. The index ended Tuesday’s session at 14,587.

“For any bull market to take place midcaps and smallcaps will have to outperform largecaps which means broader markets will have to move up by 35%-40% from current levels. The probability of that occurring is very low on an immediate basis and if that happens it will be on the back of very high volatility and the correction thereafter will be extremely painful,” said Subodh Gupta of Phillip Capital.

The call for outperformance of largecaps is growing bigger as we step into FY25 but in the past a bear market in smallcaps has fundamentally been triggered by a spike in interest rate, or liquidity tightening environment, or a sharp deceleration in growth, or a combination of both.

Both events appear unlikely currently given the recent India GDP upgrades and benign interest rate outlook, said Vinod Karki of ICICI Securities.

Nifty earnings have risen at a 21% CAGR over FY20-24, matching pace with Nifty50 rising by 77% during the past 4 years.

“Earnings outlook is still robust for FY25/CY24 as rising corporate spending and strong bank balance sheets anchor earnings growth in mid-teen over the medium term. Compared with the other Emerging markets/major economies, India has shown more robust and consistent earnings performance. Visibility of India’s cyclical upturn, full-blown capex cycle, robust demand and expected interest rate easing in 2HCY24 gives confidence in Indian companies to deliver healthy earnings growth next year,” Mirae Asset Mutual Fund said.

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(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)