Mumbai: Small-cap stocks are running wild with strong liquidity flowing in the market. BSE Smallcap index hit a record high, touching 13,752.82 on 1 March as investors cheered gross domestic product (GDP) data in December quarter beating expectations of demonetisation pangs.
That’s not all. BSE Smallcap and Midcap indices have outperformed the benchmark indices so far in 2017. BSE Smallcap index rose 14.17%, BSE Midcap climbed 12.79%, while Sensex and Nifty jumped around 9% year-to-date.
Analysts, however, are worried about such a surge in small-cap stocks, saying the fundamentals are not supporting the rally. “There is a bubble in small-cap stocks and valuations look stretched,” said Ambareesh Baliga, an independent equity analyst.
He added that investor looking for value in a liquidity-driven market are creating such froth in small-cap stocks.
Baliga warned that the implementation of goods and services tax (GST), the March quarter results, monsoon forecast and the US Federal Reserve’s decision on interest rates may impact small-cap stocks.
But that is not keeping investors away from buying in small-caps laden with juicy returns. Out of the 777 stocks in the BSE Smallcap index, 23 have given over 200% returns in a year till 1 March.
Thirumalai Chemicals Ltd soared 580.62%, Tata Metaliks was up 489.7%, Shilpi Cable Technologies Ltd jumped 371.1%, Sudarshan Chemical Industries gained 344.1%, Allsec Technologies Ltd was up 343.8% and Aptech Ltd rose 323.9%, among others.
Out of the total, 108 stocks have risen above 100% in this period. As many as 136 stocks, however, have also given negative returns.
Abhijeet Dey, senior fund manager (equities) of BNP Paribas, agrees that though valuations are expensive, retail high networth individuals are chasing small-caps as overall market performance has been good. According to him, there could be a dry spell of funds in small-caps with a few initial public offers (IPO) lined up in March. According to reports, five IPOs are likely to hit capital markets in March and are expected to raise Rs3,860 crore.
However, Dharmesh Kant, vice-president and head, retail research, Motilal Oswal Securities, said the small-cap rally is reasonable and will sustain.
He added that GST implementation will in fact be favourable for both mid- and small-cap stocks as business will move to the organized sector from the unorganized. He said earnings growth was driving the rally in this sector as metals, financials, power and infrastructure showed firm growth in the December quarter and are expected to perform better in the March quarter.
However, there may be a few more reasons to be worried. According to a Deutsche Bank report, liquidity-driven expansion in valuations looks unlikely to sustain with no material change in earnings estimates and no visible evidence suggesting the risk of consensus earnings downgrades—seen over the past three consecutive years.
It sees GST implementation impacting consensus earnings in the second half of the fiscal year 2018.
