“Small(cap) is beautiful even if expensive”. This has been the money-making mantra of Dalal Street’s fast-growing retail army of investors who have been rewarded with handsome gains of Rs 26 lakh crore in FY24. Warnings of froth from markets regulator Sebi, value investors or brokerages and stress tests by mutual funds did little to loosen the hold of ‘The God of Small Things’ in the broader market.

The combined market capitalisation of BSE Smallcap index of 1,000 stocks has grown by Rs 26 lakh crore to Rs 66 lakh crore now in the financial year. In the process, 252 stocks or every fourth stock in the smallcap index has given multibagger returns.

The rally crossed sectoral boundaries and only 124 stocks have given negative returns this financial year.

Some of the top smallcap gainers in the year are Jai Balaji Industries (1,878%), Waaree Renewable Technologies (810%), Force Motors (522%), Inox Wind (441%), Suzlon Energy (369%) and Kalyan Jewellers (281%). Defence and rail stocks like Ircon International, Jupiter Wagons, RVNL, Cochin Shipyard, Titagarh Railsystems, PTC Industries and Mazagon Dock Shipbuilders also gave multibagger returns.

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Prompted by the market regulator Sebi, warning of expensive valuations in the midcap and smallcap space, the BSE Smallcap index has lost 6.5% in the last month. The correction has prompted many analysts to predict a deeper sell-off in the broader market as was seen in 2018, when following a very strong rally, midcap/smallcap indices corrected by 24%/31% between Jan-Oct 2018.

Analysts at HSBC believe the current macro and market dynamics are very different, and corrections should be shallower at the index level due to strong growth outlook, expectations of rate cuts and strong support from retail flows into domestic mutual funds.

Despite the recent correction, the smallcap index is still up around 61% in the last one year with bulls finding enough reasons to start cherry-picking winners once again.

Noting that earnings in mid and smallcaps have recorded a CAGR of 30% and 37% since 2018 vs 16% for largecaps, Anand Rathi said smallcaps are expected to report strong earnings growth in the medium term.

“Even if we assume fair PE multiples of the respective indices would be significantly lower than the average forward PE multiples during similar phases of business cycles in the past, we do not observe any major froth in the Indian equity markets currently. On the contrary, Nifty Smallcap 250 seems to be trading significantly below the fair valuation,” Anand Rathi research analyst Sweta Jain said.

A technical analysis done by Nuvama shows that the current scenario is a corrective phase in the ongoing bull market and has reached an oversold condition at key support levels. While recommending long positions, the brokerage said it appears the price correction phase is over and will likely lead to a bottoming and a resumption of the bull phase.

“The long-term and medium-term trend remains bullish and the current decline has kept the primary trend intact. The emergence of Hammer & Inside candlestick pattern indicates that an intermediate low is in place in the Smallcap100 index,” said Nuvama’s Manav Chopra.

(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)