Midcaps, smallcaps outperform in April; here are the best and worst performers

Indian equity markets, after being under pressure for the last four months, saw a sharp recovery in the month of April 2023. The Nifty index rose 4 percent during the month led by value buying on the back of the recent correction in the Indian markets. However, broader markets outperformed benchmarks in the month for the first time since December 2022.

The Nifty Midcap index advanced nearly 6 percent in the previous month and the Nifty Smallcap index jumped 7.5 percent. Meanwhile, in March, when Nifty was up just 0.3 percent, Nifty Midcap and Nifty Smallcap indices lost 0.3 percent and 1.7 percent, respectively. However, in 2023, all 3 indices are completely flat.

In 2022, midcaps were almost in line with the benchmark. While the Nifty rose 4 percent in 2022, the Nifty Midcap 100 added 3.5 percent during the year. Smallcaps, however, massively underperformed the frontline indices, down over 12 percent in 2022.

Most experts believe that post the recent correction, the valuations of midcaps and smallcaps are now favourable. Indian markets are likely to give muted returns in the current calendar year and broader markets are also expected to be in line with benchmarks, with flattish returns this year. But now that valuations of mid and small caps have improved, investors can take a stock-specific approach to accumulate more stocks from this space, advise experts.

Outlook

Deepak Jasani, Head of Retail Research, HDFC Securities, believes that there could be some small/mid-cap stocks for picking in any kind of market. Key things to focus on in shortlisting such stocks include fast growth in recent times in topline and improvement in margins, decent return ratios, fair capital allocation policies, progressive corporate governance practices, presence in sectors where there are few entry barriers and fewer chances of disruption, etc, he suggested.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, also noted that since the broader market has corrected more, mid and smallcaps have turned attractive. Long-term investors can make lumpsum investments in the leading mid and small-cap mutual funds now, he advised.

Gaurav Dua, SVP Head of Capital Market Strategy at Sharekhan, by BNP Paribas, as well, believes that post the recent correction, the valuations have turned attractive.

“Nifty trades at around 18x FY2024 consensus earnings estimates which is largely in line with long-term average valuation multiples. As an investor, one should look at current volatility to accumulate quality stocks available at prices that are 15-25 percent lower than their 52-week high level. One needs to keep in mind the big picture of a multi-year upcycle in the Indian economy and the potential upside in equities over the next 2-5 years,” he said. Dua warned that investors should avoid expensive stocks that can suffer from de-rating of valuation multiples in a current tough macro environment and global uncertainties.

Fisdom Research further noted that the midcap and small-cap segments of the market faced challenges in March 2023 but recovered in April, with an overall lackluster performance on a YTD basis as well. This correction is natural in the current turbulent times, following their significant outperformance in the past. While short-term challenges persist, these segments may continue to offer potential for long-term growth for investors who carefully evaluate their investment choices, it stated.

In a contrarian view, brokerage house Nuvama expects both midcaps and smallcaps (SMID) to underperform benchmarks on the back of broadening downgrades. "We expect earnings slowdown to broaden heron. This is likely to weigh on mid-caps earnings more adversely… Hence, we continue to have a large-cap bias and recommend a move towards leaders," it said.

As per the brokerage, market share consolidation and shift from unorganised to organised has been the key market theme over the last five years. This shift has benefitted midcaps more than largecaps as small shifts in their market share can result in much stronger demand and profit bounce, noted Nuvama. However, the environment is now changing with market share tailwinds behind and liquidity tightening. This typically tends to hurt listed companies; within it, the smaller and inefficient ones a lot more, the brokerage pointed out.

Stocks

In the month of April, only 9 of 100 stocks in the Midcap100 index and 5 stocks in the Smallcap100 index gave negative returns. Rest all stocks were in the green in the previous month.

In the midcap index, Prestige Estate, Indraprastha Gas, Navine Fluorine, Clean Science, Astral, L&T Tech, Tata Elxsi, Oracle and Nippon India jumped between 10 and 20 percent. However, IPCA Labs lost the most, 12 percent. Patanjali Foods, PB Fintech, Honeywell Auto, Ramco Cements, and Fortis Health shed between 1 and 5 percent each.

Meanwhile, in the smallcap space, Anupam Rasayan surged the most, up 39 percent in April. It was followed by Borosil Renewables and Tanla Platforms, up over 22 percent each. Cyient, Lux Industries, Laxmi Organics, and MedPlus Health jumped over 15 percent each.

However, MCX lost the most, down over 7 percent followed by Radico Khaitan and Route Mobile, down over 5 percent each. CAMS and Quess Corp were the only 2 other stocks in the red in the smallcap index in April.