About 70 smallcap stocks miss the D-Street FY24 blockbuster list, correct up to 81%

Camlin Fine Sciences, Hinduja Global Solutions, Allcargo Logistics, Orient Electric, Navin Fluorine International, Tatva Chintan Pharma, Campus Activewear, Sharda Cropchem, Delta Corp, and GRM Overseas are among these 30 names.

The worst hit is Sanmit Infra, shedding more than 80% so far in the current financial year. NIIT Ltd is the second biggest loser, correcting more than 67%.

A relatively higher number of gainers in the segment though, overshadowed these laggards, and helped the S&P BSE Smallcap index log more than 55% returns in FY24.

The unperturbed faith of retail investors, coupled with higher participation of both foreign and mutual funds led the strong rally in smallcap stocks and also drove the market capitalization of BSE listed stocks near $5 trillion during the financial year. Note that largecap stocks have relatively underperformed during this period.

The returns of the smallcap index would have been higher if not for the sharp correction seen this month. The BSE Smallcap index has cracked more than 8% and the Nifty Smallcap gauge has plummeted 10% so far in March.

End of February, a warning by capital market regulator SEBI over the skyrocketing and the unprecedented inflows into midcap and smallcap funds of asset management companies fizzled out the euphoria and brought about a correction in smallcap stocks.

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What Lies Ahead?

Over the last 12 months, the smallcap index has significantly outperformed the largecap index and consequently, the valuation in terms of price-to-earnings (P/E) ratio is meaningfully higher than the long-term (10-year) average.

The 1-year forward P/E for the Nifty Smallcap 100 index is 21.5x versus its 10-year average of 16x.

“While corporate earnings over the next couple of years are expected to remain steady, it would not be prudent to expect the pace of growth to be similar to the previous 4 years.

Hence, there is a likelihood that the current valuations for the mid & smallcap indices could witness mean reversion,” said Ashish Shanker, MD & CEO of Motilal Oswal Private Wealth.

Anand Rathi Shares holds a rather contrarian view on this segment and believes that smallcaps will continue to outperform over the next 12 months.

“Even if we tone down consensus earnings expectations and take valuation multiples lower than ‘normal’ in this phase of the business cycle, we observe no valuation froth,” the brokerage firm said.

Now, which side of the coin wins is anyone’s guess…

(Data inputs from 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)