scorecardresearchSharp earnings downgrade, uncertain outlook impede small-cap recovery

Sharp earnings downgrade, uncertain outlook impede small-cap recovery

Updated: 24 Aug 2022, 11:32 AM IST
TL;DR.

According to a recent report by BofA Securities, the earnings estimate for the Nifty Smallcap Index has been cut by 7 percent and 1 percent for 2022-23 (FY23) and 2023-24 (FY24), respectively, this year.

According to a recent report by BofA Securities, the earnings estimate for the Nifty Smallcap Index has been cut by 7 percent and 1 percent for 2022-23 (FY23) and 2023-24 (FY24), respectively, this year.

According to a recent report by BofA Securities, the earnings estimate for the Nifty Smallcap Index has been cut by 7 percent and 1 percent for 2022-23 (FY23) and 2023-24 (FY24), respectively, this year.

The Nifty Smallcap 100 Index is down 17 percent year-to-date, even as the benchmark Nifty50 and the Nifty Midcap 100 are back in the green.

A report by Business Standard noted that sharp earnings downgrade and an uncertain outlook have impeded recovery in shares of smaller companies from this year’s lows.

According to BofA Securities, the earnings estimate for the Nifty Smallcap Index has been cut by 7 percent and 1 percent for 2022-23 (FY23) and 2023-24 (FY24), respectively, this year, BS said.

By comparison, the Nifty Midcap pack has seen earnings upgrade of 5 percent and 8.7 percent for FY23 and FY24, it added.

BS pointed out that the Nifty had tumbled as much as 16.5 percent from this year’s highs in June amid global risk-off. The fall was sharper for the mid-and small-cap universe at 21 percent and 33 percent, respectively.

A fall of more than 20 percent from a recent high is considered to be a ‘bear market’. While the Nifty and the Nifty Midcap indices have managed to recoup losses, those with small-cap exposure are still left licking their wounds, it said.

As per BS, earnings downgrade notwithstanding, the Street is still penciling in lofty earnings growth from small-caps. The consensus growth earnings per share estimate for the small-cap pack is 36 percent and 24 percent for FY23 and FY24, respectively, it informed.

By comparison, it is 15 percent/16 percent and 19 percent/27 percent in FY23/FY24 for the Nifty and the Nifty Midcap, respectively, added BS.

Due to the Nifty’s sharp outperformance of the Nifty Smallcap Index, the latter is now commanding a valuation premium. However, experts told BS that larger companies can withstand global risks better.

Typically, investments in small-caps are considered to be high-beta. In simple words, they tend to fall and gain more than large caps during a market upturn/downturn. If the latest rebound extends, small-caps could perform better, observed experts.

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First Published: 24 Aug 2022, 11:32 AM IST