You are using an older browser version. Please use a supported version for the best MSN experience.

Is irrational buying in undiscovered stocks driving mid-cap, small-cap rally?

LiveMint logoLiveMint 28-04-2017 Nasrin Sultana

Mumbai: Though mid-cap and small-cap indices touched record highs on Tuesday, analysts are cautious about expensive valuation, mostly due to the sharp run-up in undiscovered stocks. The BSE Midcap and BSE Smallcap were up 23.07% and 27.73%, respectively, year-to-date till 26 April, outperforming benchmark indices. The BSE Sensex was up 13.12% and the Nifty 14.25% in the same period.

Valuation-wise, one-year forward price-to-earnings (PE) ratio of the Sensex and Nifty are around 17 each, while BSE Midcap’s and BSE Smallcap’s PE ratios are at 18.9 and 18.5, respectively.

Kotak Institutional Equities is uncomfortable about the nature of the sharp rally in stock prices, especially of mid-caps and small-caps names, which do not show significant changes in underlying fundamentals.

“It seems we are getting into a zone of irrational exuberance. We are unable to fathom bullishness of the market with respect to midcaps and smallcaps names, which are seeing rapid increases in market capitalisation without any real changes in their fundamentals. It is not as if the stocks were inexpensive to start with.It is perhaps easier to believe the narratives around ‘undiscovered’ stocks rather than well-researched large-cap names,” it said in a report on 17 April.

The brokerage firm is cautious that a joyride can turn into a crash rather quickly.

Most analysts agree that the mid- and small-caps have run ahead of time and the feeling of being left out is driving more investors to buy undiscovered stocks in the rally, riding on a gush of liquidity.

Prakash Diwan, director at Altamount Capital Management, said that as markets continue to rally, investors are waiting on the sidelines to enter markets and don’t mind buying anything on the table but savvy or mature investors are chasing only fundamentally strong companies in the mid- and small-cap basket. “Only retail investors who are looking to make quick bucks are buying undiscovered stocks but institutional investors are not getting carried away by this phenomenal rise,” he said.

Kotak added that it is also possible that limited knowledge about undiscovered names may have made it easier for a section of the market to believe narratives about the names. “Large-cap stocks are generally well-researched and it is hard to find new virtues in familiar stories,” it said.

Among small-cap stocks, Indiabulls Venture rose 598.62% in a year’s time, Tata Metaliks Ltd soared 512.4%, ITI Ltd surged 322.3% and Thirumalai Chemicals Ltd climbed 314% , year-to-date 26 April. Jindal Stainless Ltd, Aptech Ltd, Jindal Stainless Hisar Ltd, Phillips Carbon Black Ltd, Sudarshan Chemical Industries, Venky’s India Ltd, Escorts Ltd, Rain Industries Ltd, Lumax Industries Ltd, Gujarat Narmada Valley Fertilizers & Chemicals, Atlanta Ltd India, I G Petrochemicals Ltd and Future Lifestyle Fashions Ltd jumped over 200% each over a one-year period ending 26 April.

In the mid-cap segment, Indian Bank is up 209.85%, while Sun TV Network jumped 162.7% in the one-year period ending 26 April. Other stocks like Bajaj Finserv Ltd, Piramal Enterprises Ltd and Hindustan Petroleum Corp Ltd are up 142.2%, 123.1% and 101.5%, respectively, in the same period.

Karthikraj Lakshmanan, senior fund manager – equities, BNP Paribas Mutual Fund, said that though the rally in mid-caps is faster than that in the benchmark indices, few stocks in the basket have earnings support. “There may be froth in the mid-cap segment, but there are many stocks which, even if expensive, have strong fundamental support,” he said. Lakshmanan added that market leaders in sectors like consumer discretionary will still come under the mid-cap segment due to their size but are not frothy.

Analysts also feel that interest rate reduction by the central banks have aided mid- and small-cap stocks. “Interest burden is a massive cost for smaller companies and a cut in it definitely aids growth for them,” Diwan added.

More From LiveMint

image beaconimage beaconimage beacon